New Delhi:
In a significant development that could reshape the economic landscape of the Maldives, India has voiced concerns over the recent trade agreements signed by the island nation with China and Turkey. These agreements, particularly the free trade agreement (FTA) with China that came into effect on January 1, 2025, are expected to exacerbate the Maldives’ already fragile economy.
The Maldives, strategically located in the Indian Ocean with a $7.8 billion economy, has long been a focal point of influence for both India and China. The country’s economy is struggling with low foreign exchange reserves and substantial external debt, making it vulnerable to economic instability. The new trade pacts have raised alarms in India, which has historically been a key financial supporter of the Maldives.
The China-Maldives FTA eliminates tariffs on over 95% of products traded between the two countries, a move that is anticipated to result in significant customs revenue loss for the Maldives. This loss is expected to further strain the country’s already struggling economy. Businesses in China, particularly in the Shandong Province, are projected to save millions in tariffs, but the benefits for the Maldives appear to be less clear-cut.
In addition to the FTA with China, the Maldives has also signed a trade agreement with Turkey, which involves reduced tariffs on both sides. This dual exposure to reduced tariffs is likely to increase the Maldives’ balance of payments deficit and lead to further customs duty losses, complicating the country’s fiscal stability.
Randhir Jaiswal, the spokesperson for India’s Ministry of External Affairs, highlighted the concerns over the revenue loss and long-term fiscal stability of the Maldives. “Recent agreements that are likely to result in revenue loss for the Maldives Government are obviously a matter of concern and do not bode well for the long-term fiscal stability of the country,” Jaiswal stated. India has been reconsidering its financial aid to the Maldives in light of these agreements, which could impact the ongoing financial support, including a $400 million bilateral currency swap agreement and an additional 30 billion rupees ($346 million) swap arrangement.
The Maldives owes significant amounts to both China ($1.37 billion) and India ($124 million) in loans. This substantial external debt, coupled with low foreign exchange reserves, poses significant financial risks. Ratings agency Moody’s has noted that the Maldives will continue to face challenges in securing bilateral and multilateral financing to bolster its external buffers.
The new trade agreements could also disrupt supply chains and increase the Maldives’ dependency on foreign goods and services, further jeopardizing its fiscal stability. Analysts warn that this increased dependency could lead to a debt-trap scenario, similar to the economic crisis faced by Sri Lanka.
As the Maldives navigates its growing ties with China and Turkey, India is closely watching the situation, considering potential adjustments to its financial aid and trade policies. The coming months will be crucial in determining how the Maldives balances its relationships with these major powers and maintains its economic stability.
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