India helped prevent a possible default on $500 million in Sukuk bonds last month by offering the financially unstable Maldives a $50 million interest-free loan. This month’s coupon payments are supported by the loan.
Subscriptions for the bonds, which were issued in 2021, came from Egypt, Pakistan, South Africa, and the United Kingdom. In accordance with Islamic law, sukuk bonds provide investors with an opportunity to earn returns without going against the ban on interest. Instead of receiving interest payments when the financial instrument expires, investors receive a portion of the profits from the underlying asset.
To aid the island republic, the State Bank of India (SBI) has subscribed to $50 million in government Treasury bills issued by the Ministry of Finance of the Maldives, rolling over a one-year T-bill following the maturity of the previous subscription on September 19. The Maldives received a $50 million loan from the SBI in May to extend a short-term bond. As a result, the government will be responsible for paying back more than $500 million in debt in 2025 and $1 billion when the $500 million Sukuk issue matures in 2026.
To strengthen its financial position and allay fears of an early default, the Reserve Bank of India and the Maldives Monetary Authority are negotiating a $400 million foreign exchange swap. Following a tense period when Maldivian President Mohamed Muizzu urged India to remove its military personnel earlier this year, the loan and currency swap signify a resumption of relations between India and the Maldives. China and India are two of the country’s largest creditors.
The Maldives are experiencing a foreign exchange problem as a result of significant external borrowing to fund tourism-related projects, even if travel is recovering. The South Asian country relies heavily on imports, has few exports and faces enormous debt service obligations. There are experts who are still worried that the Maldives could default on its 2021 Sukuk issue, becoming the first government to do so in the history of bond offerings. The Maldives had a high debt-to-GDP ratio of 110% as of March. Its rating was reduced from CCC+ to CC by Fitch and from Caa1 to Caa2 by Moody’s.
