China, debt and the Maldives

China, debt and the Maldives
March 27 12:11 2018

Chinese lending is putting the Maldives at risk of debt distress, a study from the Center for Global Development said earlier this month. But what is debt distress and why should Maldivians care about it?

“With debt distress there is a liquidity issue and a solvency issue,” says one of the study’s authors John Hurley. “Liquidity is: ‘I can’t pay you today but I think I can pay you tomorrow.’ Solvency is much more serious. ‘There’s no way I can pay you without having to cut back to the bone.’ Debt distress means you can’t pay the debt normally.”

The study says China is heavily involved in three major projects: an upgrade of the international airport costing around US$830 million, the development of a new population centre and bridge near the airport costing around US$400 million, and the relocation of the major port.

In addition, the government has given a sovereign guarantee for a US$370 million Chinese loan. The terms for all of this financing are unclear as neither state is famed for its transparency.

The IMF and World Bank say the projects have the capacity to transform the Maldivian economy, but are concerned about the high debt being fuelled by the infrastructure scale-up.

Gateway House, a think-tank in Mumbai, says Chinese investments and aid to the Maldives have surged since 2012, supporting multiple housing projects, a power plant, a bridge, water and sewage treatment plants, hotels and airlines.

Its research says the three largest Chinese projects are together worth $1.5 billion and that there will be repayment problems.

But China denies this is the case, saying the co-operation between the two countries follows market discipline and internationally accepted rules. “The so-called ‘debt trap’ is entirely groundless,” according to the ambassador to the Maldives Zhang Lizhong. 

Nonetheless Finance Minister Ahmed Munavvar has already told parliament that public debt will be around MVR43 billion or 60 percent of GDP at the end of 2018, while the IMF and World Bank predict Maldivian debt to reach 121 percent of GDP by 2020.

President Abdulla Yameen has said the government’s foreign loans are aimed at providing youth housing, increasing the airport’s capacity to cater to eight million tourists annually and job creation.

The government is also banking on the country’s biggest cash-cow – tourism. A bigger airport would mean more visitors. More visitors mean higher revenues from key taxes – such as green and GST – as well as from charges levied on travellers at the airport.

The increased revenue would, in turn, pay Chinese debts.

“If they’re looking at the airport expansion it may work out for them but it lends them to being susceptible. Egypt is a perfect example. It depended tremendously on tourism and it suffered terribly,” says Hurley, referring to the political turmoil, deadly bombings and airline disasters that crippled the North African country’s tourism industry.

— Out of options —

What China has done is certain cases reschedule the debt profile or debt repayment.

Hurley cites the case of Venezuela, which has been given billions of dollars by China in the form of cash, loans and investment. The debts are tied to oil and oil is seen as payment.

But the Maldives lacks that option, adds Hurley as he pivots to a more regional example of what could happen if Malé struggles or even fails to pay its debts.

Last December Sri Lanka handed the port of Hambantota to China on a 99-year lease, a deal seen as necessary to reduce the debt owed to Beijing. A state-owned firm has a 70 percent stake in the port.

“China is running the port for the most part, they’re receiving revenue from it. That’s my understanding. China can end up running the (Maldives international) airport or taking a stake in it,” he says. “There is another possibility,” he adds. “Djibouti.”

The CGD report says that by, the end of 2016, 82 percent of Djibouti’s external debt was owned by China.

The Horn of Africa nation is on the Gulf of Aden, one of the world’s busiest shipping routes, and last August China opened its first overseas military base there.

“The Chinese have agreed to forgive or give more favourable terms in return for certain military access,” says Hurley. “There might be some arrangement, because of where the Maldives is located, in return for certain ports or future agreements.”

But there will be no foreign military activity in the Maldives, according to the country’s ambassador to China, although there is an agreement for China to build a maritime observatory in Haa Dhaalu atoll.

An alternative scenario if the Maldives struggles to repay China is one that would have a more direct impact on everyday life.

“There could be an increase in tax or services may be reduced because they have to use these funds to service the debt,” says Hurley. “That has happened in other countries – redirecting funds to China instead of citizens.”

Photo: presidencymaldives.gov.mv

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5 Comments

  1. Not an economist
    March 27, 12:34 #1 Not an economist

    When referring to the debt problem of the Maldives, the term ‘necessity evil’ comes to mind. Despite the fact that these projects do increase debt if the government can provide firms with opportunities to expand and grow their businesses I’m failing to see how this could be an issue. It is because, in the long run, the government can balance their accounts with the added revenue gained through taxes. However, as we have observed from the past, if the government keeps crowding out the private sector from having any significant influence on the economy there is much to be concerned.

    Reply to this comment
    • Mises
      March 27, 15:27 Mises

      Oh, come on, increased government debt and the proposition of making the private sector bigger? Haven’t we learned anything from the Keynesian policies that still hasn’t brought back advanced economies back to its pre-crisis growth levels? If we want the Maldives to maintain sustainable economic growth, we need austerity and to solve this debt burden we pose our children. Growing debt mainly to a global superpower is the more significant problem. After all economic independence is what nations must desire.

      Reply to this comment
      • Not an economist
        March 27, 16:58 Not an economist

        It is quite ironic that you’ve mentioned austerity and advanced economies, given the fact that IMF and Germany have got it so wrong by imposing austerity measures in Greece. Moreover, as far as the debt burden posed on our children is concerned, I would like to say that though they may be in debt if the economy is strong enough we could repay that debt. However, for that to work, we need more industries. Afterall what better way to seek economic independence when we reach a state where we don’t have to rely on foreign aid.

        Reply to this comment
        • Mises
          March 27, 17:38 Mises

          I admire your wishful thinking, but let’s face the reality of the situation. We face high taxes at the moment. Are you implying that we add more taxes? If so how do you propose this can grow our businesses?

          Reply to this comment
  2. Sandeep
    March 29, 19:58 #2 Sandeep

    Maldives will never face debt issues as they will become Chinese Military base , parking docks for Chinese nuclear submarine and a Chinese Colony in today’s world picking sides is not only dangerous but also self detrimental .. relying on just one source of income (i.e.) tourism is suicidal Maldives deserves far better but its dictating government has chosen a path it construes to be correct i would only say best of luck to Maldivians .. India will always be for help when they need India !

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