India raises concerns over Maldives' recent trade pacts with China and Turkey

India warns that trade agreements with China and Turkey could negatively impact the Maldives' fragile economy.

Prime Minister Narendra Modi (R) and Maldives President Mohamed Muizzu shake hands before their meeting at Hyderabad House on October 7, 2024, in New Delhi, India. Photo by Sonu Mehta/Getty Images

By Hayu Andini and Adila Ghina

India has voiced concerns that recent trade agreements signed by the Maldives with China and Turkey could harm the archipelago's struggling economy, which is grappling with low foreign exchange reserves and a significant external debt burden. The Indian foreign ministry issued a statement on Friday expressing apprehension over these new trade pacts, particularly in light of the Maldives' ongoing fiscal challenges.

The Maldives, an island nation strategically located in the Indian Ocean, is a crucial area of influence for both China and India. With a $7.8 billion economy, the Maldives has faced mounting pressure due to substantial debt obligations and concerns about a possible default.

Trade agreements with China and Turkey spark concern

On January 1, the Maldives entered into a free trade agreement with China, a deal that Indian analysts have warned could significantly worsen the nation's balance of payments deficit. As one of the Maldives' primary suppliers of consumer goods, China is integral to the country's trade network. However, experts have pointed out that the agreement could lead to greater dependence on Chinese imports, resulting in increased customs duties and potential disruptions to the supply chain.

In addition to the deal with China, the Maldives signed a trade pact with Turkey in 2024, which reportedly involves reduced tariffs on goods exchanged between the two countries. While these trade agreements are seen as opportunities for economic growth, their long-term effects on the Maldives' fiscal stability remain uncertain.

Indian foreign ministry spokesperson Randhir Jaiswal expressed concern over the potential revenue losses for the Maldives government as a result of these agreements. "Recent agreements that are likely to result in revenue loss for the Maldives government are obviously a matter of concern and do not bode well for the long-term fiscal stability of the country," he told reporters on Friday.

Although Jaiswal refrained from directly naming China or Turkey, his remarks suggest that India is closely monitoring the situation and may adjust its own foreign policies in response.

Debt and economic strain in the Maldives

The Maldives' economy has been under significant strain due to its high levels of external debt. According to World Bank data, China and India are two of the largest creditors to the island nation, with the Maldives owing $1.37 billion to China and $124 million to India. These debts have further compounded the country's fiscal difficulties and raised fears of a potential default.

To help alleviate some of these challenges, India signed a $400-million bilateral currency swap agreement with the Maldives in October. Additionally, India agreed to begin discussions on a free trade agreement focused on goods and services, which is aimed at strengthening bilateral ties and supporting the Maldives' economic recovery.

However, despite these efforts, the Maldives' foreign exchange reserves remain alarmingly low, with the country struggling to meet its external debt obligations. A report from Moody's Ratings Agency in December indicated that the Maldives would continue to face challenges in securing sufficient financing to bolster its external reserves.

Financial stability in jeopardy

As the Maldives navigates its economic challenges, the nation will likely continue to rely on both bilateral and multilateral financial support to address its fiscal shortfalls. India's concerns over the trade pacts with China and Turkey reflect broader geopolitical and economic considerations, as the Maldives' growing debt burden and reliance on foreign trade agreements may strain its long-term stability.

While the agreements with China and Turkey could offer short-term economic benefits, experts warn that the long-term effects on the Maldives' fiscal health remain uncertain. With its debt continuing to climb, the Maldives may face increased vulnerability to external economic shocks, which could further jeopardize its financial standing in the international community.

As the situation unfolds, India and other regional powers will likely continue to monitor the Maldives' economic developments closely, adjusting their foreign policies as necessary to ensure their interests are protected in this strategically important region.