India announced a $760mn bailout package for the Maldives. The cash-strapped Indian Ocean island nation turned to New Delhi in order to avoid a sovereign default, despite its president’s attempts to lean towards China. India’s Central Bank announced on Monday that it had agreed to currency swap lines worth $400mn ($357mn), and Rs30bn (about $357mn), with the Maldives. This move cements New Delhi as a central player in its economy.
The swaps were made during a New Delhi meeting between Indian Prime minister Narendra Modi, and Mohamed Muizzu who was elected Maldivian President last year under the “India Out” platform.
Muizzi’s campaigns capitalized on the resentment of the Maldives – a Muslim majority country with just over 500,000 people – towards its huge northern neighbor. In written remarks released by his office before his arrival in India Muizzu referred to India, as “our nearest neighbour, with whom share deep historical and cultural ties”. He said that India’s close proximity and its long-standing support were crucial to the Maldives’ development and stability.
The Maldives’ net or usable forex reserves fell in September to approximately $36mn, according to the country’s monetary authorities. This shows the severity of the crisis that the dollar-pegged currency rufiyaa is facing. Modi’s Office said that the swaps were “instrumental” in helping the Maldives overcome the financial challenges they face. India has already extended $100mn in short-term loans to the Maldives, allowing it to pay interest this month on the $500mn Islamic Sukuk due next year.
Investors were worried that Maldives could be the first to default on its sukuk debt, which follows Islamic rules against interest. This year, Muizzu told India to remove its small military force from islands. The force was mainly used for medical evacuations and maritime monitoring.
Muizzu’s first visit abroad as president was to China, New Delhi’s main regional rival. Since then, India and the Maldives have reconciled. Civilians have taken the place of the soldiers.
Muizzu stated that the Maldives also “cultivated a robust partnership with China”, which was described by him as “one our top development partners”, and included projects within Beijing’s flagship global Infrastructure Programme, the Belt and Road Initiative.
The State Bank of India , a state-owned bank in India, agreed last month to lend $50mn to Maldives. This was just days before the Maldives had to pay a $25mn coupon on sukuk.
Indrani bagchi, the chief executive officer of the Ananta Centre in New Delhi, said that India could not turn away the Maldives, given its ambitions to be a net provider of security in the Indian Ocean.
Bagchi added that “India has also become more aware of its role in the Maldives. This includes a large humanitarian role, which is something no other country can replicate.” After the Covid-19 travel bans and high expenditure on infrastructure projects, debt ballooned in Maldives.
Investors’ fears of a default by the government led to a sharp drop in the price of the country’s 2026 sukuk, which traded at 70 cents per dollar. Following the bailout announcement on Monday, they rose by 0.4 percent to 80 cents per dollar.
India, wary of Chinese influence on its doorstep, has tried to help regional neighbours who are experiencing economic hardship. New Delhi gave Sri Lanka nearly $4bn worth of loans and grants in 2022 after the country suffered from a crippling cash crisis.
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