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.”