Maldives signs MoU with China for local currency business exchange

New Delhi, Sep 14: The signing of a Memorandum of Understanding (MoU) between the government of Maldives and the People’s Bank of China (PBOC) on Friday marks a step forward for the country's economic strategy and a sign of first relief for Maldives facing a massive foreign exchange crisis.

India is likely to have a similar agreement with the Maldives as talks between the two countries are already happening, negotiating an MoU that allows trade in the local currencies and Indian rupees. The Maldives imports goods worth USD 780 million annually from India.

Chances are that the agreement may be signed when President Muizzu visits India in coming weeks. "The president's visit to India is expected soon, with discussions currently underway to finalise the exact date," Maldives spokesperson Heena Waleed informed the press on September 10, without offering further details about the trip. The possible agreement would allow the Maldives to settle payments for Indian imports in local currency, offering relief to its foreign exchange reserves and reducing dependency on the US dollar.

This one agreement and another in the pipeline, allows Maldives for transactions and direct investments in local currencies with India and China moving away from dependence on the US dollar will be a big relief for the country struggling to wriggle out of the debt.

Such a shift is crucial for the Maldives, as the country is grappling with a foreign exchange crisis, particularly due to its declining reserves of US dollars despite Maldives' major tourist business happening in foreign currencies.

Maldives media says that the MoU with China is a proactive move by President Mohamed Muizzu’s administration, aiming to ease the country's foreign exchange pressures. This bilateral currency trading framework is also expected to facilitate smoother trade relations and country-to-country investments. China, like India, is Maldives' largest trade partner with annual imports exceeding USD 720 million. The implication of these currency agreements represents a major departure from the traditionally dominant role of the US dollar in international transactions.

By trading in local currencies, the Maldives and its partners aim to bolster economic resilience, reduce foreign currency outflows, and improve the overall efficiency of cross-border transactions. In particular, this arrangement with India and China could alleviate some of the economic pressures of Maldives caused by a high import bill and global commodity price hikes.

Maldivian analysts suggest that these developments are particularly timely, given the Maldives' risky economic situation. The country’s foreign exchange reserves have plummeted to their lowest level in eight years, with only $437 million available as of August 2024, barely enough to cover 1.5 months of imports as reported by the Diplomat.

The situation is further compounded by the Maldives’ high external debt, much of which is owed to China. According to Moody’s, which recently downgraded the Maldives’ credit rating, the country faces a looming risk of default on its debt obligations unless it secures external financing. In fact, to avoid defaulting on creditors, the Maldives needs to raise $114 million by the end of 2024, $557 million in 2025, and a staggering $1.07 billion in 2026 as reported by The Diplomat.

Moreover, the Maldives has taken additional measures to mitigate the foreign exchange crisis. The government has amended tax regulations, requiring individuals earning revenue in US dollars to pay taxes in the same currency.

This move is expected to help the state collect more dollars and further stabilise its reserves.

The Maldives’ economic development minister, Mohamed Saeed, earlier said that the nation is not looking to sever ties with any country but is instead seeking to diversify its economic relationships.

The MoU with China and the potential agreement with India are seen as essential steps in achieving this goal. These deals will likely serve as a buffer against future economic shocks, allowing the Maldives to better manage its debt obligations and improve its balance of payments.

As President Muizzu prepares for his official visit to India, where an MoU on currency trading may be signed, the Maldives stands at a crossroads. The success of these currency deals will be instrumental in determining whether the country can sail through its economic challenges and avoid the looming threat of a debt default.

The outcome of these negotiations will also shape the future of the Maldives’ trade relationships with its two largest partners India and China potentially shifting the balance of power in the region’s economic landscape.