MMA warns rising domestic borrowing poses risks to Maldives' financial stability

The Maldives Monetary Authority (MMA) has warned that the government's increasing reliance on domestic borrowing to finance the budget deficit poses risks to the country's financial stability, recommending that the government prioritise securing the external financing included in the proposed MVR 59.7 billion state budget for 2027.

The central bank raised the concerns in its technical assessment of the proposed budget, signed by Governor Ahmed Munawwar and submitted to Parliament's Budget Committee on Tuesday.

The assessment identifies risks associated with government borrowing, debt servicing, expenditure, revenue collection and foreign currency reserves.

The proposed 2027 budget projects an overall deficit of MVR 9.4 billion, equivalent to 7% of gross domestic product (GDP), with total financing requirements estimated at MVR 18.9 billion.

Of this amount, approximately MVR 12 billion, or 63%, is expected to be raised through domestic financing.

The domestic financing plan includes MVR 8.7 billion from the issuance of government securities, MVR 2.4 billion from the Sovereign Development Fund (SDF) and MVR 900 million from repayments of previously issued loans.

The MMA noted that 78% of the budget deficit in 2026 was also expected to be financed through domestic borrowing.

According to the central bank, the government's increasing issuance of Treasury bills and Treasury bonds has resulted in commercial banks holding a growing proportion of their assets in government securities.

By the end of September 2026, government Treasury bills and bonds accounted for 35% of the total assets of commercial banks in the Maldives.

The MMA warned that the increasing concentration of government debt in banks' asset portfolios posed a risk to the stability of the financial system.

To reduce this exposure, the central bank recommended that the government prioritise securing the MVR 6.9 billion in external financing included in the 2027 budget.

The proposed external financing comprises MVR 2.4 billion in foreign loans, MVR 1.9 billion in budget support and MVR 2.7 billion through the issuance of bonds and sukuk.

The MMA also noted that rising domestic borrowing and higher interest rates were expected to increase debt-servicing expenditure by 11% in 2027, with interest payments projected at MVR 4.99 billion.

The MMA expressed concern that total public debt, including government-guaranteed debt, is projected to reach MVR 161.3 billion by the end of 2027, equivalent to 125% of GDP.

The central bank noted that the Maldives had already spent more than USD 500 million on debt repayments in 2026, including the settlement of sukuk obligations.

According to the MMA, this represents the highest amount spent on debt repayments in a single year in the country's history.

The authority also raised concerns about pressure on official foreign currency reserves, citing the impact of higher international oil prices associated with the conflict in the Middle East.

To strengthen the country's capacity to meet external debt obligations, the MMA recommended depositing all foreign currency revenue collected through the Airport Development Fee (ADF) into the Sovereign Development Fund.

It also called for the SDF to be given a separate legal status and governance framework to ensure that sufficient funds remain available for external debt repayments.

The MMA noted that government revenue excluding grants is projected at MVR 42.8 billion in 2027, while recurrent expenditure is budgeted at MVR 42.7 billion.

This means recurrent expenditure would account for 99.7% of projected revenue excluding grants.

The central bank warned that any shortfall in revenue or increase in recurrent expenditure could raise the amount of financing required to cover the budget deficit.

The MMA recommended measures to control recurrent expenditure, particularly spending on public sector employees, subsidies and healthcare.

Under the government's pay harmonisation policy, all remaining public sector employees are expected to be transferred to the new pay framework in 2027.

As a result, expenditure on employees and pensions is projected to increase by 4% to MVR 17 billion, accounting for approximately 29% of the total budget.

The MMA recommended improving the efficiency of government institutions and limiting recruitment to control expenditure.

The central bank also called for changes to the government's subsidy arrangements.

Expenditure on subsidies and financial assistance is projected at MVR 13.9 billion, representing approximately 23% of the proposed budget.

The MMA recommended reviewing the existing blanket electricity subsidy and introducing a targeted system to direct assistance towards eligible beneficiaries.

It also advised the government to consider fuel price hedging arrangements and accelerate renewable energy projects to reduce exposure to fluctuations in international oil prices.

On healthcare expenditure, the MMA noted that the 2027 budget projects a 16% reduction in health insurance costs.

The reduction is expected to be achieved through Aasandha reforms, including the introduction of a co-payment or prepayment mechanism from January 2027 and the expansion of bulk procurement.

However, the MMA warned that expenditure could exceed the budgeted amount if the reforms were not implemented as planned.

The MMA also highlighted the increase in recurrent expenditure denominated in foreign currencies over the past five years.

These expenses include training programmes, scholarships, student loan schemes and the operation of Maldivian embassies and diplomatic missions overseas.

The central bank recommended strengthening controls over these expenditures to protect official reserves.

It also raised concerns over the proposed increase in spending on Public Sector Investment Programme (PSIP) projects.

The 2027 budget allocates MVR 8.2 billion to PSIP projects, an increase of 26% compared with 2026.

According to the MMA, the use of contractor financing arrangements for numerous projects has contributed to growth in the money supply and placed pressure on the exchange rate.

The central bank warned that these arrangements could create challenges for monetary and financial stability.

It also noted that projects implemented through state-owned enterprises often require foreign currency allocations from official reserves.

To reduce this pressure, the MMA recommended seeking external financing for such projects and prioritising ongoing developments before commencing new projects, based on available financing.

The authority also raised concerns about capital injections and loans to state-owned enterprises.

Although MVR 2 billion has been allocated for these purposes in 2027, the MMA noted that actual expenditure had exceeded approved allocations by several times over the previous two years.

It warned that similar overruns could occur in 2027.

The MMA noted that total government revenue, including grants, is projected at MVR 43.2 billion in 2027.

However, it observed that the budget does not include new revenue-raising measures and that a substantial proportion of government revenue depends directly or indirectly on tourism.

The central bank warned that a further slowdown in tourism associated with the conflict in the Middle East could affect revenue collection.

It recommended preparing a contingency plan to address potential revenue shortfalls.

The MMA also suggested strengthening the audit functions of the Maldives Inland Revenue Authority (MIRA) to increase corporate income tax collection from the tourism sector.

According to the assessment, outstanding revenue owed to the government through MIRA had reached MVR 14.5 billion by the end of June 2026.

The authority also highlighted difficulties in collecting customs revenue, noting that outstanding payments to Maldives Customs Service had increased.

As Customs is the government's second-largest revenue-generating institution, the MMA supported the proposal to transfer administrative responsibility for customs revenue matters to the Ministry of Finance.

The central bank also raised concerns about revenue expected from extensions of resort lease periods.

It noted that less than 74% of the revenue projected from resort lease extensions for 2026 had been collected.

The 2027 budget targets MVR 771 million, equivalent to approximately USD 50 million, from resort lease extensions and other fees collected by the Ministry of Tourism.

The MMA recommended coordination among the relevant government institutions to achieve this target.

It also called for an assessment of the potential impact of free trade agreements signed with foreign countries on import duty revenue.

The central bank's assessment emphasised the need to reduce reliance on domestic borrowing, control recurrent expenditure, secure external financing and strengthen revenue collection to manage the fiscal and financial risks associated with the 2027 budget.