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India has granted the Maldives a bailout package to help the island nation avoid an unprecedented sovereign default next month due to an Islamic form of debt.
India’s largest state-owned bank has agreed to lend the Maldives an additional $50 million, the Indian High Commission in the country said in a statement late Thursday, days before the archipelago is due to pay a coupon of about $25 million on an Islamic sukuk.
Sukuk follow Islamic principles by foregoing traditional interest payments and instead offering creditors a share in the profits of an underlying financial instrument.
No government has ever missed a sukuk payment, but in recent weeks investors have become concerned that the Maldives could be breaking new ground in a market being tapped by countries such as Egypt, Pakistan, South Africa and the UK.
High borrowings for infrastructure projects have plunged the Maldives into a foreign exchange crisis despite a recovery in tourism in the island paradise.
The Maldivian sukuk traded at around 78 cents on the dollar on Friday, recovering from lows of 70 cents after Fitch Ratings downgraded the country’s credit rating into junk territory this month.
The State Bank of India, which had previously lent the Maldives $50 million, also extended a short-term loan in May, underscoring the archipelago’s reliance on emergency aid from New Delhi as President Mohamed Muizzu’s government seeks a permanent solution to the crisis.
The country still needs to find a way to repay more than $500 million in debt next year and $1 billion in 2026, when the $500 million sukuk matures.
The SBI loan, in the form of a one-year treasury bond, is higher than the Maldives’ net foreign exchange reserves last month.
These shrank to $48 million from gross reserves of $470 million as the country faces high debt repayment bills and maintains the Rufiyaa’s peg to the dollar. India is one of the country’s largest creditors, along with China.
“These subscriptions were made at the special request of the Government of the Maldives as emergency financial assistance,” the Indian High Commission said. The new treasury note will not carry any interest, it added.
During last year’s election campaign for the Maldivian presidency, Muizzu vowed to reduce Indian influence in the archipelago, which led to an early dispute with the Narendra Modi government.
But the two countries renewed their ties as the financial crisis in the Maldives deepened. Muizzu’s office has said he plans to visit Modi in New Delhi soon.
The government has said it is also seeking a $400 million currency swap agreement with India through a South Asian regional organization.
This month, China’s central bank announced it had signed a memorandum of understanding with the Maldives to facilitate trade settlement in local currencies – another sign of support.
