Maldives: The Latest Victim of Chinese Debt Diplomacy

China is now the second largest economy in the world. As a result, it wants to increase its might in different parts of the world. Over the past few years, China has started using an ingenious model to force smaller nations to bend to its will. There have been several casualties of China’s aggressive foreign policy. In this article, we will understand how China has gained a tremendous amount of control over the Maldives.

How China’s Debt Diplomacy Works?

  • China first finds a poor country which is unable to obtain loans for infrastructure projects

  • China funds the country for building vanity infrastructure projects. This means that the projects do not have any intrinsic value and do not generate much cash-flow

  • Over a period of time, these countries are not able to pay back the loans which are due to China. This is because these loans shouldn’t have been made in the first place. These loans were made with an intention that the borrower will default

  • China then obtains control of some strategic asset of the nation in lieu of its loan payments

  • Many countries in the world have already fallen into this debt trap. Sri Lanka has already lost their Hambantota port to China. Similarly, Kenya is on the verge of losing the Mombasa port which is known as the gateway to East Africa to China. Other countries like Laos and Nigeria have also faced the same situation. Similarly, China has also acquired a port from Greece because it defaulted on its debt to China. Many nations are worried that China is preparing itself for a military war and is, therefore, buying bases near rival nations.

  • By now, the world is already aware of how China tends to trap countries in their debt spiral. Hence, Maldives is in the same situation that Sri Lanka and Kenya were earlier. It is surprising that despite knowing all this, Maldives is still walking straight into the trap.

China’s Growing Influence in The Maldives

India was the dominant trade partner in the Maldives right till 2014. This changed drastically when Chinese President Xi Jinping visited the small island nation. The Chinese realized the strategic importance of having a key ally in the India Ocean. As a result, Xi Jinping persuaded the people of Maldives to sign a free trade agreement with China.

The Free Trade Agreement with China was a decisive point since that is where the Maldives began preferring China as their trading ally. As per this agreement, both the countries have reduced the tariffs for most of their goods to zero. Also, both nations have opened their avenues for investments. However, as expected, the Chinese have an upper hand in the process. Chinese businessmen have been rapidly accumulating tourism related assets in the Maldives. Since tourism is the biggest occupation in the Maldives, this is giving the Chinese an iron grip on the economy.

Many critics in the Maldives have protested the decision to sign an agreement with China. They believe that this agreement will lead to a loss of more than $4 billion per annum in customs duties. However, the Maldivian government is of the opinion that this loss will be more than compensated by the new trade and new employment opportunities which are being created thanks to the Free Trade Agreement.

The Maldivian government also believes that opening the Chinese markets is beneficial for their local economy. This is because since the Maldives is no longer a poor nation, the European Union has started charging a 25% tariff on the imports from the Maldives. This was making it difficult for Maldivian folks to sell fish and fish products in these markets. However, with the opening of the Chinese market, the European market has become unimportant. China has a huge population and can definitely absorb all the fish related products that the Maldives has to offer.

Maldivian Dependency on China

The problem with Maldives’ policy is that too much is happening too soon. This small island nation is no match for the economic might of China. The Maldives had a favorable balance of trade with China till 2014. However, within no time this balance has shifted in favor of Chinese. Most of this happened after the Maldives started importing huge quantities of raw materials which will be used in vanity infrastructure projects. In the year 2016 alone, Maldives imported 20000% more goods from China than it exported to China. There are several unnecessary roads and bridges being built in the Maldives. Also, there are more than 7000 houses being built on the deserted Hulhumale Island. Most of these projects are being built by Chinese firms who employ Chinese engineers and foreign laborers.

Hence, the people of Maldives are not getting any employment from the project. However, they are liable to pay the debt! The Maldives now imports more than 16% of its products from China which is now its biggest trading partner. Prior to this, India was Maldives biggest trading partner. Their share of Maldivian imports stands at 13%. Also, at the present moment, Maldives owes more than 35% of its debt to Chinese investors. This number is expected to reach 50% by the year 2020.

China’s actions seem to be hinting at a future military action. Why else would this global giant want to loan huge sums of money to countries like Sri Lanka and Maldives which are very close to its arch-rival India.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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