India’s bailout for Maldives eases fear of default

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India has offered the Maldives a bailout that will help the island nation avoid an unprecedented sovereign default on an Islamic form of debt next month.

India’s largest state-owned bank has agreed to lend an additional $50 million to the Maldives, India’s high commission in the country said in a statement late Thursday, days before the archipelago is due to pay a bond of about $25 million of dollars for an Islamic sukuk.

Sukuk follows Islamic principles in avoiding traditional interest payments and instead gives lenders a share of the profit from an underlying financial instrument.

No government has ever missed a sukuk payment, but investors have grown concerned in recent weeks that the Maldives would break new ground in a market exploited by countries such as Egypt, Pakistan, South Africa and Britain.

Heavy borrowing for infrastructure projects has plunged the Maldives into a currency crisis, despite a recovery in tourism to the island paradise.

Maldives sukuk traded at about 78 cents to the dollar on Friday, a rebound from a low of 70 cents after Fitch Ratings downgraded the country’s credit rating earlier this month.

State Bank of India, which previously lent the Maldives $50 million, also resumed a short-term bond in May, underscoring how the archipelago relies on temporary bailouts from New Delhi, while the government of President Mohamed Muizzu is seeking a lasting solution to the crisis.

The country still needs to find a way to repay more than $500 million in debt next year and $1 billion in 2026, when the $500 million sukuk matures.

The loan from SBI, which took the form of a one-year treasury bill rollover, is higher than the Maldives’ net international reserves as of last month.

These have shrunk to $48 million, out of $470 million in gross reserves, as the country grapples with large debt repayment bills and maintains the rufiyaa currency’s peg to the dollar. India is one of the country’s biggest creditors, along with China.

“These subscriptions were made at the special request of the government of Maldives as emergency financial assistance,” the Indian High Commission said. The new government bond would have no interest payments, he added.

Muizzu campaigned for the Maldives presidency last year on a pledge to reduce Indian influence in the archipelago, leading to an early row with Narendra Modi’s government.

But the two countries rebuilt ties as the Maldives’ financial crisis deepened. Muizzu’s office said he plans to visit Modi in New Delhi soon.

The government said it is also seeking a $400 million foreign exchange deal with India through a South Asian regional body.

This month, China’s central bank said it had signed a memorandum of understanding with the Maldives to facilitate trade settlement in local currencies, in another sign of support.