The Malé Turnaround

PRIME MINISTER Narendra Modi’s visit to the Maldives on July 25-26 delivered a strong message about India’s lasting influence and presence in the region. In September 2023, President Mohamed Muizzu won the elections piggybacking the ‘India Out’ campaign and began to diversify relations from India by doubling down on China under the pretext of a ‘pro-Maldives’ policy. Yet India’s accommodative engagement, China’s underperformance, and a brewing economic crisis pushed Muizzu to recalibrate. Modi’s visit indicates that India is reciprocating to this recalibration and will continue to be the country’s steadfast partner.

Following his swearing-in in November 2023, Muizzu cancelled the Maldives’ hydrographic agreement with India, asked New Delhi to withdraw its troops, and officially visited Türkiye and China. India understood the domestic compulsions and continued to tolerate these gestures and policies. Delhi continued with its high-level engagements, increased budget allocations, and raised export quotas. It also replaced its troops with technicians and consistently communicated its red lines to Malé. Historically, Muizzu and his party have enjoyed close ties with Beijing, and this in part fuelled his anti-India policy. During his state visit to China in January 2024, Muizzu signed over 20 MoUs, deepened defence and security cooperation, and agreed to elevate ties to a Comprehensive Strategic Cooperative Partnership. He also agreed to revive the Belt and Road Initiative (BRI) and implement the free trade agreement (FTA) in January 2025. In return, Muizzu expected investments and assistance from China. He had inherited an economy plagued with budget and trade deficits, and maturing debts. As of June 2023, it had an outstanding debt worth $6.5 billion, and a debt-to-GDP ratio of 97 per cent. Most of the borrowing was domestic. Externally, China, bondholders, and India were the top creditors.

On that visit Beijing offered a grant of $130 million and agreed to provide debt relief for the next five years. In October 2024, China refinanced a $75 million loan, but hesitated to offer relief or new loans. It has rather focused on community projects and grants under its brand of ‘small and beautiful’ projects, falling short of Muizzu’s expectations. As such, the Maldives continued to service Chinese loans and bonds, depleting foreign reserves. At the same time, Indian loans matured, increasing the country’s debts. Currently, the debt accounts to $9.4 billion, that is, 122 per cent of GDP. To China, the Maldives owes $473 million and sovereign guarantees of $567 million. With India, loans have now increased to $572 million and $608 million in sovereign guarantees. Another $800 million from India’s previous commitments is yet to be disbursed.

Anticipating this economic situation, and noticing the Indian accommodation policy, in May 2024, the Maldives foreign minister visited India to repair ties and seek economic assistance. This made way for further high-level engagements and aid. Muizzu also visited India twice, once for Modi’s swearing-in and again for his state visit in October 2024. On that trip, both countries adopted the Comprehensive Economic and Maritime Security Partnership Vision Document. Modi’s recent visit follows this tradition of high-level engagements and shows India’s significant role in the Maldives.

First of all, India has shown a clear understanding of the Maldives’ economic difficulties. From May to October 2024, Delhi rolled over T-bills worth $100 million, offered currency swaps worth $400 million, and ₹3,000

crore ($350 million). With this visit, India extended a new INR-denominated line of credit (LoC) worth ₹4,850 crore ($565 million). Both countries also signed an agreement, replacing the previous LoC denominated in US dollars. This has reduced the Maldives’ annual debt obligations by 40 per cent from $51 million to $29 million. With this, India’s direct assistance to the Muizzu administration amounts to $1.4 billion.

India is also shifting its assistance from dollars to rupees. This would relieve the Maldives from its persistent struggle with dollar reserves and further India’s quest for de-dollarisation. Over $900 million of India’s assistance to the Muizzu government is in rupees. The visit also saw the implementation of the Unified Payments Interface (UPI) which, together with the RuPay card, and finalisation of the local currency system, enables payments in local currency for tourism, business, and trade. Trade will be reinforced by the FTA whose terms of reference were finalised during the visit. The Bank of Maldives will also allow the opening of INR accounts, helping the country tap into multiple sources of the currency to sustain trade and repay Indian debts.

India has hinted at continuing development projects despite economic difficulties. On Modi’s visit, the two countries reviewed various India-assisted projects, including airports and the flagship GMCP project. Modi also handed over 3,300 housing flats and inaugurated six High Impact Community Development Projects (HICDPs). Currently, 20 out of 53/56 HICDPs are completed—12 under the Muizzu government alone. The new LoC will also be for projects in sectors such as sport, healthcare, education, and housing. The Maldives is also interested in completing these projects to effectively tap into its sources of finance and avoid the costs of delay. The projects will be seen with a relief as several state-owned enterprises have reportedly stopped undertaking new projects due to the fiscal measures.

Defence cooperation, despite its politicisation, has continued. During Modi’s visit, India handed over 72 vehicles to the Maldives National Defence Force (MNDF) and inaugurated the Ministry of Defence building. India also said that the agreement related to its three aerial units has been renewed. The new LoC will also be used for promoting security and defence of the Maldives.

With Modi’s visit, India has also demonstrated that it will work with the party in power as long as it respects Delhi’s concerns. This was the first visit of an Indian prime minister under a non-Maldivian Democratic Party (MDP) administration, since the country’s democratic transition in 2008. Modi also met several cabinet ministers and had bilateral meetings with the president, vice president, and speaker, many of whom are close to China and propagate anti-Indian views. He also met key figures from small parties that have representation in the parliament. By meeting MDP and Mohamed Nasheed separately, India also signalled that it has not abandoned its friends and like-minded partners.The visit is a significant boost to India-Maldives ties and Delhi’s long game. However, China cannot be entirely ruled out of the Maldives. Malé is discussing the implementation of a local currency settlement with China and establishing a Chinese bank. Beijing also possesses a lasting leverage in Muizzu’s Maldives with close ties, maturing debts, community development projects, and Chinese firms acting as contractors. As the economic crisis deepens, Muizzu would be keen on finding a solution by balancing both countries. A lot would now depend on how China will respond to India’s recent reassertion in the archipelago.

diplomacyIndia-Maldives relationsMaldivesmaleMohamed MuizzuMohamed NasheedNarendra Modi