New Delhi bails out Maldives after president drops ‘India Out’ approach

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India has unveiled a $760mn bailout for the Maldives after the cash-strapped Indian Ocean archipelago turned to New Delhi to stave off a sovereign default despite attempts by its president to tilt towards China.

India’s central bank said on Monday it had agreed currency swap lines of $400mn and Rs30bn ($357mn) to the Maldives, a move that cements New Delhi’s central role in supporting its economy.

The swaps were announced during a meeting in New Delhi between Indian Prime Minister Narendra Modi and Mohamed Muizzu, who was elected Maldivian president last year on an “India Out” platform.

Muizzi’s campaign capitalised on resentment in the Maldives, a Muslim-majority country of just over half a million people, towards their huge northern neighbour. But in written remarks issued through his office ahead of Monday’s announcement, Muizzu described India as “our closest neighbour, with whom we share deep historical, cultural, and economic ties”.

“India’s proximity and long-standing support have been pivotal in the Maldives’ development and stability,” he said.

The Maldives’ net or usable foreign exchange reserves fell to about $36mn in September, the country’s monetary authority said on Monday, underscoring the depth of a crisis facing the dollar-pegged rufiyaa currency.

The swaps would be “instrumental in tackling the ongoing financial challenges faced by the Maldives”, Modi’s office said after his meeting with Muizzu.

India has already rolled over $100mn of short-term dollar loans to the Maldives this year, allowing the country to make an interest payment this month on a $500mn Islamic sukuk that comes due next year.

Investors had worried that the Maldives would be the first country to default on a sukuk, a form of debt that follows Islamic strictures against interest.

Muizzu this year told India to withdraw its small military contingent from the islands, a force that mostly helped in medical evacuations and maritime surveillance.

Muizzu also alarmed India by paying one of his first foreign visits as president to New Delhi’s biggest regional rival China. However, the Maldives and India have since reconciled and civilian personnel have replaced the soldiers.

Muizzu said the Maldives had also “cultivated a robust relationship with China”, which he described as “one of our top development partners”, including through projects under Beijing’s flagship global infrastructure programme, the Belt and Road Initiative.

Last month the state-owned State Bank of India agreed to lend $50mn to the Maldives, days before it faced a roughly $25mn coupon payment on the sukuk.

“Given its ambitions of being a net security provider in the Indian Ocean, India has no way of turning away the Maldives,” said Indrani Bagchi, chief executive of the Ananta Centre, a New Delhi-based think-tank.

“There has also been a better realisation of the actual role India plays inside the Maldives, including a fairly large humanitarian role — something which cannot be replicated by any other power,” Bagchi said.

The Maldives’ foreign exchange reserves fell to critically low levels after its tourism economy was battered by Covid-19 travel restrictions and debt ballooned because of high spending on infrastructure projects and imports.

The country’s sukuk maturing in 2026 plummeted to trade at 70 cents on the dollar last month over investor fears of a sovereign default. They rose 0.4 per cent to 80 cents on the dollar following Monday’s bailout news.

Wary of Chinese influence in its backyard, India has sought to assist regional neighbours suffering economic difficulties. In 2022, New Delhi provided nearly $4bn in loans and grants for supplies of fuel, medicine and other food to Sri Lanka after it suffered a crippling liquidity crisis.