Local Businesses Treading Sovereign Debt

In this sun-kissed nation of shimmering lagoons and palm-fringed beaches, Maldives’ local businesses find themselves caught in a difficult economic cross-current.

Beneath the postcard-perfect tourism industry lies a more sobering reality: a sovereign debt burden that is reshaping the fortunes of small enterprises and larger firms alike.

For many businesses, this has meant adapting to shifting policies, coping with rising costs, and surviving in a shifting financial landscape.

According to Ministry of Finance data, at the end of the first quarter of 2025, the total government debt of the Maldives stood at MVR 126 billion, roughly 98 percent of GDP.

The World Bank reported that this ratio had crossed 112 per cent of GDP, with projections suggesting it may remain elevated for some years to come.

By late 2024, the figure climbed even higher, surpassing 134 percent of GDP, translating into more than USD 9.4 billion in combined public and publicly guaranteed debt.

For a small island nation whose economy relies heavily on tourism and imports, these numbers represent not just fiscal statistics but daily realities for the business community.

The burden of sovereign debt exerts pressure on the reserves that sustain trade and commerce. By the end of 2023, Maldives held foreign reserves of about USD 582.81 million, dipping to USD 364.36 million in September 2024 before climbing to USD 667.18 million in December 2024. Foreign reserves stood at USD 767.37 million in July 2025.

However, these figures do not fully cover the Maldives’ import needs. Maldives Customs data show the country requires about USD 66 million in essential imports per month, leaving current reserves sufficient for only around 3.2 months of essential goods.

While overall reserves increased from the previous year, usable reserves rose by six percent to USD 213 million in July 2025.

With imports making up the bulk of local consumption, businesses dependent on foreign goods struggled to secure dollars. Banks temporarily capped overseas transfers, making it difficult especially for small traders to pay suppliers abroad.

Construction firms faced delays in importing materials; guesthouse operators endured supply shortages; and retailers watched food costs rise. Inflation, driven by import cost pressures, pushed food prices up by an average of 4.8 percent in December 2024, then 5.9 percent in April 2025, before easing to 3.9 percent in October 2025.

<b>Rising tax burdens</b>

In July 2025, new tax measures aimed at shoring up state revenue added fresh pressure on businesses. The Tourism Goods and Services Tax (TGST) was raised from 16 percent to 17 percent, while the Green Tax on guesthouses with fewer than 50 rooms doubled from USD 3 to USD 6 per person per night.

For small operators in the atolls, these hikes hit particularly hard. Many guesthouse owners had to decide whether to absorb the extra cost and shrink margins, or raise prices and risk losing guests in a competitive market.

At the same time, Maldives Inland Revenue Authority (MIRA) stepped up compliance enforcement; naming and penalizing businesses that fail to comply, a burden that weighs heaviest on smaller firms with limited administrative resources.

<b>Debt obligations</b>

External debt obligations add another layer of complexity, with Maldives owing significant sums to both India and China, entangling its fiscal position with geopolitical dynamics.

By late 2024, Maldives received a debt reprieve when India extended USD 400 million in currency swaps and additional financial assistance.

In 2024, international credit-rating agencies such as Fitch and Moody’s downgraded the country, citing elevated default risks. As of late 2025, Moody’s latest review has affirmed the Maldives’ rating at Caa2 but revised its outlook from “Negative” to “Stable”.

Moody’s said the improved outlook reflects positive outcomes from policy measures implemented over the past year and ongoing efforts to strengthen the country’s debt-servicing capacity.

However, it also warned of the large repayment due next year including USD 500 million (MVR 7.7 billion) sukuk issued in 2021 and a USD 100 million (MVR 1.5 billion) bond sold to the Abu Dhabi Fund in 2018, with both instruments due for full repayment to bondholders in April 2026 and noted an increase in short-term domestic debt already amounting to 40 per cent of GDP.

According to the Ministry of Finance, deposits into the Sovereign Development Fund (SDF) increased by about MVR 1 billion compared with the previous year.

The ministry’s Weekly Fiscal Developments Report shows that as of 27 November, total SDF deposits reached MVR 2.4 billion, up MVR 1.1 billion, or 84.9 percent, from the MVR 1.3 billion recorded during the same period last year. The government attributes the rise to stronger state revenue.

<b>Glimmers of reform</b>

Structural reforms include the government’s legislation such as the National Debt Act to modernize debt management with streamlined borrowing, enhanced transparency and a new Debt Management Department.

Alongside the National Fiscal Responsibility Act, the law establishes fiscal rules, mandates clearer reporting, and strengthens parliamentary oversight to ensure accountability.

Maldives Medium-Term Debt Management Strategy aims to manage public debt sustainably by setting targets for debt-to-GDP ratios and domestic–external balances, identifying financing needs, and mitigating exchange-rate, interest-rate and refinancing risks.

It uses frameworks such as the World Bank’s Medium-Term Debt Management Strategy (MTDS) to ensure borrowing supports stable growth and investor confidence.

The government has also renewed its push for diversification. Long dependent on tourism, Maldives is now emphasizing fisheries, renewable energy and technology.

Plans include expanding processing capacity to access new fisheries markets and reducing reliance on imported fuel through renewable-energy investments creating opportunities in installation, maintenance and supply chains.

The government also announced an agreement with MBS Global Investments for an USD 8.8 billion financial free zone; the Maldives International Financial Centre (MIFC). The centre, to be completed by 2030, is expected to increase national productivity, with projected revenues of USD 1 billion in its first five years.

According to the Ministry of Finance and Planning’s weekly fiscal report, the state received MVR 33.5 billion in total revenue and free aid as of 20 November, up 9.5 percent from MVR 30.6 billion in the same period last year. Tax revenue accounted for MVR 25.2 billion, while non-tax revenue reached MVR 8 billion, exceeding estimates.

State expenditure reached MVR 35 billion, about MVR 5 billion higher in comparison to last year. This rise is partly due to a decrease in capital spending, which fell from MVR 10 billion to MVR 5 billion, while recurrent expenditure increased by MVR 1.2 billion to MVR 30 billion.

Harmonization of state pay pushed remuneration to MVR 12.1 billion, also up MVR 1.2 billion. After MVR 4.1 billion was spent on servicing loans and interest, the budget deficit stood at MVR 1.5 billion- far lower than the MVR 9.5 billion deficit in the same period last year.

<b>Preparing for the future</b>

Some businesses have begun adapting and restructuring their businesses to navigate the fluctuating economy. Guesthouses hit by the doubled Green Tax are turning to local suppliers, such as island farmers, reducing import costs and creating opportunities to market themselves as eco-friendly.

Exporters, especially in fisheries, are diversifying into value-added products smoked, dried or packaged fish and forming direct partnerships with restaurants, resorts and retailers to bypass the middlemen. Others are exploring subsidies and grants for sustainable gear and fuel-efficient equipment.

What began as a short-term necessity may evolve into competitive advantage, as global markets increasingly value sustainability.

Looking ahead, local businesses may strengthen resilience by diversifying financing sources, including microfinance and cooperatives.

Such collective models can provide bargaining power when importing goods or negotiating with suppliers. Embracing technology and sustainability; from green packaging to renewable energy and digital services, may also open new opportunities align with both international trends and government priorities.

Effective use of MIRA’s digital systems will also help businesses stay compliant while reducing administrative strain.

Sovereign debt continues to shape credit availability, trade flows and tax regimes. Yet the determination of local businesses combined with government reforms and diversification efforts offers hope.

If entrepreneurs can adapt and policymakers can steer the economy toward stability, today’s debt pressures may ultimately lay the groundwork for a more resilient future.

Maldivian businesses have weathered storms before, both literal and economic. In the face of sovereign-debt pressures, that resilience may once again carry them through turbulent times.