The Maldives finds itself walking a precarious economic and diplomatic tightrope in early 2025, as President Mohamed Muizzu’s government attempts to navigate relationships with both regional powers China and India while facing a severe financial crisis.
China-Maldives Free Trade Agreement Takes Effect
The Maldives-China Free Trade Agreement (FTA) officially became effective on January 1, 2025, as announced by Minister of Economic Development and Trade Mohamed Saeed. This landmark agreement—the first free trade deal for the Maldives—encompasses trade in goods and services, investment protection, and economic cooperation, with Maldivian fisheries exporters gaining duty-free access to China’s vast consumer market.
However, the implementation has already shown concerning economic impacts. Within just two months, imports from China surged to USD 65 million, up from USD 43 million during the same period last year. More alarmingly, government revenue from import duties has plummeted by 64%, falling from MVR 385 million to merely MVR 138 million.
The trade imbalance remains stark—of the approximately USD 700 million in bilateral trade between the two nations, Maldivian exports comprise less than 3% compared to China’s dominating 97% import share. Under the FTA, the Maldives removed tariffs on 91% of Chinese goods, a concession that appears to yield little reciprocal benefit given the country’s narrow export base.
Diversification Attempts and Economic Measures
In an effort to diversify economic partnerships, the Maldives has also signed a Preferential Trade Agreement (PTA) with Turkey, announced during President Muizzu’s state visit in November 2023. This agreement, set to take effect in the coming months, aims to boost bilateral trade and includes collaborations in areas such as investment, renewable energy, and higher education.
Confronting the mounting economic crisis, the Muizzu administration has implemented various emergency measures, including increasing the Tourist GST tax rate from 16% to 17%, doubling the green tax, and imposing new departure taxes and airport development fees. The government has also begun divesting stakes in state-owned enterprises and approving mergers of key companies, including Maldives Airports Company Ltd. and Regional Airports Company Ltd.
India’s Growing Financial Support
The Maldives currently faces a severe financial crisis with external debt obligations of $600 million due in 2025 and $1 billion in 2026. Foreign exchange reserves hit critical lows in 2024, reaching just $21.97 million in July and even turning negative in August, though recovering slightly to $65 million by December.
Despite President Muizzu’s initial “India Out” campaign stance, his administration has pragmatically turned to India for crucial financial support. In October 2024, India provided a comprehensive package including a $400 million currency swap and an additional $357 million swap arrangement that allows businesses to operate in local currencies rather than dollars. India’s assistance has become essential for the Maldives’ economic survival as it navigates its precarious financial situation.
Diplomatic Point
The economic reality has forced a notable softening in the Maldives’ stance toward India. Early in Muizzu’s tenure, anti-India rhetoric had reached its peak, with comments from Maldivian ministers mocking Indian Prime Minister Narendra Modi, triggering calls for boycotting Maldivian tourism in India. However, as China’s promised support failed to materialize amid the deepening fiscal crisis, the administration began reconsidering its position.
By early 2025, the government-initiated efforts to rebuild relations with India. A landmark moment came when Foreign Minister Abdulla Khaleel visited India, signaling an end to the hostilities that had persisted through much of 2023 and 2024. This diplomatic thaw was further strengthened when Muizzu attended Indian Prime Minister Modi’s third-term inauguration in June 2024, followed by a state visit to New Delhi in October.
During this visit, India not only extended the currency swap deals but also agreed to initiate talks on a potential Free Trade Agreement focused on goods and services, potentially creating a counterbalance to the China-Maldives FTA.
China’s Growing Presence in Maldivian Waters
Despite economic ties with India improving, China continues expanding influence in the Maldives through:
- Discussions about deploying Chinese fish aggregating devices in the Indian Ocean
- February agreement between Maldives Environmental Protection Agency and China’s South China Sea Institute of Oceanography for marine research
- Chinese research vessel Xiang Yang Hong 03 spending a month in Maldivian waters in early 2024
These developments raise concerns about potential strategic implications beyond fishing and research assistance.
Economic Outlook
The Maldives’ economic future remains uncertain as the country attempts to balance relationships with both regional powers. Global financial institutions, including the World Bank and Moody’s, have raised alarms about the Maldives’ growing fiscal vulnerabilities, with rising public debt and fiscal spending as key concerns.
As the China-Maldives FTA opens the Maldivian tourism sector to Chinese companies and financial institutions, there are concerns that financial benefits may increasingly flow back to Chinese companies rather than strengthening the Maldivian economy. While Chinese tourists contribute significantly to visitor numbers, the economic benefits of this relationship are increasingly being questioned.
The Maldives now faces the complex challenge of managing its relationships with both India and China while addressing its severe economic crisis—a delicate balancing act that will require careful navigation in the months ahead.
