Last month, India extended a $50 million interest-free loan to the financially unstable Maldives, helping it avoid a possible default on $500 million in sukuk bonds. This loan will support the payment of coupons due this month.
The bond, issued in 2021, was subscribed to by countries including Egypt, Pakistan, South Africa and the United Kingdom. Sukuk bonds are compliant with Islamic law and offer investors a way to generate profits without violating the prohibition on interest. Investors receive a portion of the profits from the underlying financial instrument rather than paying interest at maturity.
To support the island republic, the State Bank of India (SBI) underwrote $50 million in government treasury bills issued by the Maldives Ministry of Finance and rolled over one-year T-bills after the previous underwriting maturity. September 19th. In May, SBI loaned $50 million to the Maldives for the rollover of short-term bonds.
As a result, the government will have to repay more than $500 million in debt in 2025, and more than $1 billion in debt in 2026, when the $500 million sukuk issue matures.
The Maldives Monetary Authority has arranged a $400 million foreign currency swap with the Reserve Bank of India to strengthen its financial position and ease fears of immediate default.
The loan and currency exchange marks the resumption of ties between India and the Maldives after tensions erupted earlier this year when Maldivian President Mohamed Muiz asked India to withdraw its military personnel. India and China are among the country’s biggest creditors.
Despite a recovery in tourism, the Maldives is facing a currency crisis due to large amounts of external borrowing to finance tourism projects. The South Asian country is heavily dependent on imports, has limited exports and faces high debt servicing. Some experts remain concerned that the 2021 sukuk issuance could be Maldives’ first bond default, making Maldives the first government to default on sukuk payments. As of March, the Maldives’ debt-to-GDP ratio was as high as 110%. Fitch and Moody’s downgraded the ratings to CC from CCC+ and to Caa2 from Caa1, respectively.
