The government has decided to provide a sovereign guarantee for a $300 million sukuk that the Bank of Maldives (BML) is seeking to issue to foreign investors.
According to the proposed national budget for next year, the Finance Ministry noted that providing this guarantee will increase the state's total guaranteed debt, so the Ministry has revised its targets for guaranteed debt levels.
The government had previously aimed to reduce guaranteed debt to 10 percent of GDP by the end of 2028. However, the target has been revised in next year's budget to a new goal of maintaining guaranteed debt below 15 percent of GDP.
The budget document states that this shift in a key fiscal target was made to support the banking sector.
The government noted that the BML sukuk would facilitate the expansion of the banking industry and create opportunities for profitable tourism investments within the economy. Furthermore, it is expected to bolster state revenue in the medium term.
According to the budget, the Finance Ministry estimated that guaranteed debt would have stood at 7.5 percent of GDP next year without the BML sukuk. However, with the inclusion of this sukuk, the ratio is projected to rise to 13.5 percent next year.
The government plans to utilise these funds to finance resort development in the northern Maldives. The budget highlights that this capital will be used to increase bed capacity in the region, thereby expanding economic activity and employment opportunities in the north.
When BML announced its intention to issue a sukuk, the bank stated that this first-ever move to tap into international markets was intended to mitigate the impacts on tourism caused by global conflicts. The bank also noted that the funds would provide an "indirect solution" to its ongoing dollar liquidity challenges.
The government has maintained that no funds raised through this sukuk will be used for the state budget or to manage government cash flow. Former Finance Minister Moosa Zameer previously said that this was a collaborative effort with BML to promote tourism in both the north and south of the Maldives.
Despite Zameer’s earlier remarks, the budget document does not mention using the sukuk proceeds for tourism development in the southern region.
While the government is providing a guarantee for the BML sukuk, the budget document also acknowledges that guaranteed debt poses a significant risk to public finances. It warns that this risk is escalating annually.
Finance Ministry statistics show that as of June this year, guaranteed debt stood at MVR 19.1 billion, equivalent to 15.4 percent of GDP. Notably, 97 percent of this debt is denominated in foreign currency.
