Illusory budget surplus masks economic peril as debt crisis looms

“Maldives curbs spending by 21 percent,” state media proclaimed. “Maldives budget surplus soars,” touted a pro-government outlet. The leading local daily highlighted “expense cuts” despite a decline in revenue.   

But the facade of the raw numbers belies a troubling reality: foreign currency reserves that barely cover two months of essential imports, billions worth of unpaid bills crushing small businesses, and nearly US$ 700 million in debt payments looming this year. 

The debt service obligation rises to a whopping US$ 1.07 billion in 2026, eclipsing gross international reserves that stood at US$ 708 million in January.

The MVR 1.4 billion (US$ 90 million) surplus was posted two days after the International Monetary Fund reiterated calls for an “urgent policy adjustment” to rein in deficit spending and manage crippling public debt that reached US$ 9 billion or 133 percent of GDP last year as credit ratings agencies downgraded the Maldives to junk status.

“The Maldives is navigating a pivotal moment to urgently restoring macroeconomic stability and debt sustainability,” an IMF staff mission observed after annual consultations in February, repeating stark warnings relayed to lawmakers, and advising “swift implementation” of a “homegrown fiscal reform agenda” outlined in the 2025 budget. 

As part of the reforms, the government hiked tourism-related taxes in December, doubling the green tax and airport charges for tourists to the chagrin of the resort industry. A one percent rise in the tourism sales tax is due to come into force in June. 

But the administration wavered when it came to tough choices. It recoiled from politically sensitive cuts that would impact the public, including streamlining the Aasandha health insurance scheme, reducing the bloated workforce of inefficient state-owned enterprises, and phasing out blanket subsidies for food, electricity and fuel in favour of targeted assistance for the poor. 

Last month, the ruling party supermajority in parliament advised against a 10 percent pay cut sought by the president. Meanwhile, in lieu of belt-tightening, the government continued seemingly frivolous outlays and populist giveaways: offering utility discounts for Ramadan at the cost of MVR 160 million, spending MVR 28 million on Eid lights, and handing out 40,000 cases of free canned tuna.

Despite President Dr Mohamed Muizzu canceling Independence Day celebrations among austerity measures announced in June last year, government offices organised extravagant staff nights and mass delegations departed on overseas trips. Political appointments continued unabated.  

The Maldives Independent was awaiting a response from the President’s Office at the time of publication. 

The budget surplus as of February 13 was nearly double the MVR 600 million posted during the same period last year.

That positive balance proved to be fleeting. By May 2024, the budget was in deficit by MVR 700 million, ballooning to MVR 15.3 billion by the end of the year, and surpassing the deficits of the pandemic years.

“This was only the second month of the year. It's not surprising to have a surplus at this stage. The numbers are higher because capital expenditure has been slashed. They are not paying small businesses and contractors who are going bankrupt because of this,” former finance minister Ibrahim Ameer told the Maldives Independent. 

“If there is truly a surplus in excess of billions, why not pay these bills? What's the point of sitting on it? I think they are keeping it because they know we have payments to loans due.” he said.

The failure to pay local businesses and construction companies for completed government projects has been a longstanding concern that dates back to the previous administration.

According to the fiscal update, some savings were made through curtailed budgets for office supplies, repairs and maintenance. But recurrent expenditure on salaries was up from MVR 450 million to MVR 519 million.

The bulk of the savings came from capital expenditure. It was down by MVR 686 million compared to the same period last year, reflecting a scaled-back public sector investment programme (PSIP). 

Coupled with unpaid bills worth MVR 2 billion owed to the construction industry, the lower spending on infrastructure projects has repercussions throughout the wider economy, explained Athif Shukoor, an economist and commentator. 

“Capital investments in the form of government contracts and projects is a large part of what rolls the economy. This creates the multiplier effect. That has now been sharply reduced,” he told the Maldives Independent.

“These are the people who take government projects, buy aggregate and sand from an importer, rent a boat for delivery there, do the logistics in the islands – that's driving the economy for small businesses. When you stop that, it will break many small companies. When you stop that, the economic activity has slowed down.”

In addition to a higher wage bill compared to last year, expenditure increased on subsidies and the universal health insurance scheme – two key areas targeted for reform. Aasandha spending was up significantly by MVR 173 million.

At the same time, revenue was down by MVR 359 million. Both tax and non-tax revenue declined despite a five percent increase in tourist arrivals compared to January and February last year. Receipts from the goods and services tax – a crucial indicator for consumer sentiment –  as well as revenue from import duties were both down. 

“When you combine these two, with the reduction in income, we are looking at a very precarious situation,” Athif warned.

The precipitous drop in revenue was both perplexing and worrying. 

“Are some people not paying GST? Are they saying that since the government is not paying bills, they will hold on to GST revenue? Or has the business cycle really slowed down? That would be more concerning,” Athif said. “GST numbers being down indicates a slowing down. That's more dangerous to the larger economy if we are slowing down. We need to study this.”

Speaking at parliament’s public accounts committee last month, Deputy Speaker Ahmed Nazim echoed these concerns. “It is alarming. Our revenue has fallen sharply. The reason for this has not been explained in a way people can understand what's going on,” he said.

The veteran lawmaker offered a possible explanation for the sharp drop in customs revenue. "We know that the largest chunk of revenue we get is from cigarettes and importing of cigarettes has come to a halt," he said. The decrease was due to importers stockpiling cigarettes ahead of a tariff hike in November, he suggested. 

Businesses have yet to resume shipments in normal quantities “​​because they haven’t run out of the huge stocks they imported” under the old tariffs, he explained, referring to hiked tariffs that drove up the average price of a pack of cigarettes from MVR 110 to MVR 250.

Nazim warned that Aasandha expenses could exceed MVR 3 billion this year, representing 10 percent of total revenue in 2024.

“The problem is we are hesitating and delaying the implementation of reform measures,” he said. “We can't see the economic issues being addressed. We are not seeing positive progress and on top of that, there are no cost-cutting measures either.”

In December, ratings agency Moody’s maintained a negative outlook for the Maldives despite a bailout from India and new foreign exchange controls, casting doubt over the ability to repay the substantial external debt.

“In the absence of a comprehensive financing package or very drastic policy adjustments, wide twin deficits and FX imbalances point to significant downside risks with an increasing probability of default,” the agency concluded.

But both Ameer and Athif were confident that a disastrous debt default could be averted.

"If there is the will, they can still take measures to right the ship. We don't need to default, we have what it takes to manage the situation," said Ameer, the former finance minister. 

"But that means the government needs to prioritise what PSIP works need to go on and introduce the reforms that we have been talking about. With the current burden on the government, it's not going to be easy."