The Mohammed Muizzu government in the Maldives is planning to remove legal impediments for implementation of the Free Trade Agreement (FTA) with China. The FTA, termed as a one-sided treaty by the former President Ibrahim Solih will not be economically beneficial for a small economy like the Maldives. If this economic pact is implemented there will be a surge in imports from China and make the Maldives more dependent on China. At this time, however, the incumbent government cannot implement the FTA, as long as the Maldivian Democratic Party (MDP) has a majority in the Parliament. The forthcoming Parliamentary elections will be crucial in protecting Maldives’ economy by ensuring that the government is unable to pass the FTA. However, recall that the present Muizzu administration had made this one of its poll promises and is likely to ush through its implementation at any cost, in the aftermath of the President’s recent visit to China.
President Muizzu said during his visit that China remained "one of our closest allies and development partners." He praised the Belt and Road Initiative (BRI) projects launched by President Xi Jinping in 2014, saying that they "delivered the most significant infrastructure projects witnessed in Maldivian history". He also said that his administration was committed to the quick implementation of the FTA signed with China, describing it as a ‘symbol’ of the close commercial ties between the two countries. Signed in December 2017, the FTA was rushed through in the Maldives Majlis by the Yameen administration in violation of constitutional provisions as most of the opposition leaders were absent at the time of voting. The Solih administration subsequently, paused the FTA citing it as being harmful to the interests of the Maldivian economy.
The FTA is a comprehensive document covering trade in goods, services, and investment as well as economic and technical cooperation. Foreign ownership of land has been included as a commitment in the agreement along with “unbound” access for Chinese nationals in the services sector. Chinese investors will be allowed to open tour & travel related representative offices in Maldives and operate cruise/live-aboard tourist accommodation vessels. Tourists would pay offshore in dollars or book online and transfer money to Chinese bank accounts. This would also affect Maldives’ tax collection as well as employment opportunity for locals. Consequently, more tourist arrivals from China will benefit the Chinese economy more than the Maldivian economy.
Significantly, the proposed FTA also provides for an overarching “security exemption” (Article 86) relating to the disclosure of any information which is determined to be contrary to the security interests of either party. Further, there are clauses for security exceptions under “trade in services” relating to supply of services for the purposes of provisioning a military establishment. Prior to signing the FTA, some recognition needs to be given to the fact that China is the biggest bilateral creditor of the Maldives owning around US$ 1.4 billion of the latter’s debt. The Maldives has requested China for a debt moratorium till 2027, which is yet to be approved. China has also not favourably responded to a currency swap request from Maldives made on 29 January 2024 asking China to initiate formal discussions to open a branch of a major Chinese bank to facilitate the currency swap arrangement through the People’s bank of China.
Though the Maldives has a surplus in its commercial services trade, due to robust receipts from tourism, the services surplus is unlikely to offset the rising deficit in goods trade. The implication will be a widening imbalance in the current account of its balance of payments. The FTA will further worsen trade imbalance, draining out the scarce foreign exchange. Chinese goods will enter Maldivian market free of tariffs depleting Maldives’ revenue in the form of customs duties. But the most dangerous impact of FTA is that it covers free trade in goods as well as services.
It is anticipated that once the FTA is signed, the demand for imports will increase as ongoing and new Chinese projects on the island, especially those that are part of the Belt and Road Initiative (BRI), gather momentum. One example is the underground tunnel connecting Male and RasMale, claimed to be first of its kind. This will be a high-cost vanity project involving land reclamation and housing projects construction. It will also involve connecting islands close to Male' city via bridges. All these highly capital-intensive proposals are untenable for the Maldivian economy and will push it further into debt. Notably, higher imports from China will enhance the trade imbalance of the Maldives and increase its overall trade deficit. The Maldives’ overall export earnings are much lower than expenditure on imports, and with its exports to China unlikely to rise after the FTA, the country might soon find itself struggling with a fast-rising trade deficit.
Set against the backdrop of the ‘India Out’ campaign spearheaded by former President Yameen and ably supported by the incumbent President, the move to sign the FTA signals a determination to keep India away in every sphere. This extends to the defence sphere also. Recent reports indicate that the Maldives is planning to procure military drones from Türkiye, citing the need to monitor its coastline. China has also offered to supply arms and weapons to the Maldives. It is ironic that India, which has provided security to the Maldives for many decades now, is being shunned and its personnel, involved in training and assisting the Maldivian Defence Forces are being asked to leave. The import of arms by the Maldives from third countries will also impact the economy which is already reeling under high debt and budget constraints.
In the days ahead, the Muizzu administration will take steps to formally sign the China-Maldives FTA. This may happen despite the Progressive Party of Maldives not enjoying a majority in the Majlis. If this happens, as was done in 2017, the Maldives will once again come under the Chinese umbrella, presenting a clear and present danger to the Indian Ocean region and the sea lanes surrounding the Maldives. Realisation of the reality of the long-term negative implications of the FTA will only sink in when China takes over the Maldives, as happened in Sri Lanka. By that time it will be too late.
