INVESTMENT CLIMATE STATEMENT, 2007 - MALDIVES

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TAGS: KTDB OPIC ECON USTR EINV EFIN ETRD ELAB PGOV
MV
SUBJECT: INVESTMENT CLIMATE STATEMENT, 2007 - MALDIVES

REF: 2006 State 178303


1. Per reftel, below is the investment climate statement
for Maldives for 2007.

INVESTMENT CLIMATE STATEMENT-MALDIVES

FEBRUARY 2007

Investment Climate

--Introduction

Maldives is comprised of over 1,190 islands, of which 198
are inhabited and 87 are exclusive resort islands.
Population is about 350,000, while over 600,000 tourists
arrive annually. The capital, Male?, has a population of
103,000. GDP in 2006 totaled about $900 million, or about
$3,000 per capita (exceeding the average of about $700 in
the rest of South Asia). Over the past decade, real GDP
growth averaged over 7.5 percent per year except for 2005,
when GDP declined following the Indian Ocean tsunami.
Economic growth has been powered mainly by tourism and its
spin-offs in transportation, communication, and
construction. While income disparity remains high, this
growth also resulted in considerable social progress. The
net enrollment in primary education is close to 100
percent. Literacy rates are about 98 percent. Infant and
maternal mortality are declining rapidly.

The Indian Ocean tsunami in December 2004 devastated many
islands, with damage estimated at $450 million. Yet the
Maldivian economy has made a remarkable recovery from the
tsunami. A rebound in tourism, development of new resorts,

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and post-tsunami reconstruction helped increase GDP by
nearly 18 percent in 2006 following a contraction of 4.5
percent in 2005.

Growth is expected to continue in 2007 at a rate of over 10
percent, fueled by tsunami reconstruction, new resort
construction and government services. Inflation has
moderated to about 3 percent from over 6 percent in 2004-

2005. The trade deficit has expanded sharply in recent
years as a result of high oil prices and imports of
construction material. In 2006, the trade deficit reached
an estimated $600 million. However, as tourism recovered
and government borrowing increased, the balance of payments
recorded a surplus of about $40 million in 2006 from a
deficit of $17 million in 2005.

Government spending has increased sharply due to tsunami
reconstruction and increased social and capital investment.
Government expenditure was estimated at 75 percent of GDP
in 2006 compared to 36 percent of GDP in 2004 before the
tsunami. Government expenditure is set to rise further to

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92 percent of GDP in 2007. The budget deficit was 18
percent of GDP in 2006 and will increase sharply in 2007 as
a result of this increased expenditure. Government revenue
comes mainly from tourism and import tariffs. The
government hopes to borrow from banks and resort operators
to meet the 2007 deficit. However, the government needs to
return to fiscal prudence quickly to ensure future economic
stability.

Maldives ranked 53 out of 175 countries in the World Bank's
(www.worldbank.org) Ease of Doing Business 2007 Index,
ahead of its South Asian neighbors. The index investigates
regulations that enhance or constrain business activity.
Within the index, Maldives ranked first in terms of paying
taxes (Maldives has no income or sales tax),fifth in
employing workers, and ninth in dealing with licenses. But
in terms of registering property, getting credit, and
closing a business, the country ranked lower, at 172, 143,
and 114, respectively. Other ranks were as follows:
starting a business 31, protecting investors 60, trading
across borders 91, and enforcing contracts 83.

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According to the World Bank, Maldives will ?graduate? from
Least Developed Country (LDC) status in 2011. Maldives?
major economic challenge beyond LDC graduation is how to
diversify the economy beyond tourism and fisheries. Tourism
will likely remain the engine of the economy. Over 40 new
resorts are expected to open in the next five years. The
government hopes to expand existing airports and build new
ones to cater to increased tourism. Other plans include
increasing capacity of ports. The government is pursuing
the establishment of a major transshipment port serving
Indian Ocean sea lanes adjacent to the northern Maldives.

The United Nations Development Program (UNDP)
www.mv.undp.org, the Asian Development Bank (ADB)
www.adb.org, and other multilateral and bilateral donors
are active in Maldives. They support government efforts to
improve basic infrastructure, promote economic
diversification, modernize education, create employment
opportunities, and spur development. The United States has
friendly relations with Maldives. To further enhance
engagement with the United States, the Government of
Maldives plans to open a diplomatic mission with a trade
office in Washington D.C. in early 2007.

--Openness to Foreign Investment

Foreign investment in Maldives is governed by Law 25/79,
which provides for an agreement between the government and
an investor. The Law of Contract governs contractual
relationships, and a separate law (No. 4/79) governs
business and trading activities by foreign nationals.
Investment agreements are for an initial period of 5 to 10
years for investments less than $1 million, and can be
renewed thereafter. For larger projects, terms are
negotiable.

Maldives began opening up to foreign investment in the late
1980s. Foreign investments in Maldives have primarily
involved resort management, but also include
telecommunications, accounting, banking, insurance, air
transport, courier services, and some manufacturing. The
Foreign Investment Services Bureau (FISB)
www.investmaldives.org within the Ministry of Economic
Development and Trade is tasked with promoting and
regulating foreign investments in the country. The FISB
reviews all proposed investments prior to granting
licenses. The FISB offers "one-stop shop" services to
investors and incentives including import duty concessions,
100 percent foreign ownership, no restrictions on
repatriation of earnings or profits, and no foreign
exchange restrictions. At present, personal income taxes
are not imposed. Banks' profits are taxed and a corporate
profit tax is under consideration for the end of the
decade. International arbitration is available for dispute
settlement.

The Government has said it is committed to improving the
investment regime and approval process. Maldives is in the
process of amending the FISB law with the help of the
Foreign Investment Advisory Service (FIAS) of the World
Bank group. Currently, approvals for new investments take
about one month. In cases where the investment is similar
to previously-approved foreign investments, immediate
approval is frequently given.

The FISB encourages investment projects which: (1) are
capital intensive; (2) enhance technology transfer; (3)
introduce new skills and offer training to local employees;
and, (4) are environmentally friendly. The FISB has
identified the following industries as offering potential
for foreign investors:

Tourism: Opportunities exist in the entire range of
services, including development and management of resorts,
tourist activities, and land and sea transportation.

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Value-Added Fisheries: Fish processing is open to foreign
investment, particularly for new technology and capital
investment.

Financial - banking, accounting, and management consulting:
The FISB is interested in bringing in more global banks.
(Only HSBC is currently present). The lack of adequate
banking laws has deterred entry, however.

Transportation and Shipping: Development of air and sea
transport including inter-atoll transport services,
bunkering, transshipment, and passenger cruises. The
development of a transshipment port in the northern
Maldives targeting the rapidly growing transshipment
traffic in the Indian Ocean is one of the government's
highest priorities. The government is currently funding
harbor-dredging projects for 103 islands on a contract
basis. Other key priorities in the transport sector are
the expansion of the Male? Airport, a bridge connecting the
capital city Male? with the airport island Hulhumale, and a
new commercial port in the Male? region.

Population Consolidation: There are two major development
plans in the government's docket. The first is a
consolidation of the services and infrastructure of 20
atolls around five regional centers. The second is a
project to alleviate overcrowding in Male? by developing
nearby Hulhumale Island, where Male?s international airport
is located.

Telecommunications and information technology also offer
potential opportunities.

While infrastructure development remains a top priority for
the government, some of the projects listed above have been
slowed as tsunami reconstruction work takes priority.

Retail trading is closed to foreign investment. The
production of any items that are illegal to import into
Maldives is prohibited.

--Conversion and Transfer Policies

There are no exchange controls or restrictions on currency
movements. Repatriation of funds and profits is allowed
after local debts are settled.

Major international currencies can be bought and sold at
banks and authorized moneychangers. Hotels and banks
accept major credit cards and travelers checks. Foreign
currency accounts are available through banks. The US
dollar is the most widely used foreign currency and is
accepted by small shops and taxi drivers in Male?.

The official exchange rate is set at 12.8 Rufiyaa to the
dollar. This rate has remained unchanged since 2001. The
Maldivian currency is non-convertible and its true value
cannot be determined. The Government has noted that it
will need to review the exchange rate policy in the next
few years in order to promote export diversification. The
heavy dependence on imports is a constraint for exchange
rate management, though tourism receipts help maintain hard
currency liquidity. Large fiscal deficits financed by the
Maldives Monetary Authority www.mma.gov.mv pose a potential
threat to the fixed exchange rate system.

To improve public expenditure controls and management, the
government has taken initial action to introduce a new
public accounting system. A new public finance law came
into force in January 2006. The Attorney General's Office
is drafting a new public accounting bill and has already
submitted an audit bill to the People?s Majlis
(parliament). There has been a delay in the passage of the
audit bill. Instead, the President has issued several
decrees on these subjects. Foreign reserves at the end of

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December 2006 were $232 million, higher than end 2005
reserves of $187 million, and were sufficient to finance
3.2 months of imports.

--Expropriation and Compensation

According to the Law on Foreign Investment (25/79) the
Government may, with or without notice, suspend an
investment, either where the investor indulges in an act
detrimental to the security of the country or where
temporary closure is necessary for national security. If,
after due investigation, it cannot be concluded within 60
days of the temporary closure that the foreign investor had
indulged in an activity detrimental to the security of
Maldives, then the Government will pay compensation.
Capital belonging to an investment that is closed for the
above reasons may be taken out of the country in a mutually
agreed manner. There appears to be little risk of
expropriation in the near future.

--Dispute Settlement

The sources of law in Maldives are its constitution,
Islamic Sharia law, regulations, Presidential decrees,
international law, and English common law, with the latter
being more influential in commercial matters. Although in
November 2005, the government announced the creation of a
10-member Judicial Services Commission (JSC) responsible
for nominating, dismissing, and examining the conduct of
all judges, the JSC was not yet fully functional by the end
of 2006. There is a High Court in Male? and lesser courts
(the number to be determined by the President) in Male? and
on other islands. There are no jury trials. The High
Court serves as court of appeal and also handles any
politically sensitive cases. There are also eight lower
courts in Male? dealing with theft, debt and property
cases. Though legal procedures are adequate, the judicial
process is slow.

Ultimate appeal may be directed to the President. In this
process, the President is briefed by an advisory board,
which goes through the appeal and recommends that the
President affirm or overturn the decision of the High
Court. Under a November 2005 Presidential decree, this
advisory board was given some independence. The current
constitution does not allow for an independent supreme
court. A process of constitutional revision initiated in
2004 has not yielded results as yet.

The law on foreign investments guarantees the security of
investments. Maldives has no laws pertaining to
arbitration. Disputes involving investments below $1
million can be referred to the courts in Maldives.
Disputes over $1 million can be referred for international
arbitration.

Recognizing that the existing legal and commercial
framework is underdeveloped and not always fully
transparent or predictable, the government is promoting
administrative reforms and formulating regulations dealing
with labor, the environment and industry. In recent years,
the People's Majlis has enacted a number of commercial
laws, including the Law of Contract, the Negotiable
Instruments of Law, and the Companies Act. Maldives is not
a member of the International Center for the Settlement of
Investment Disputes (ICSID).

--Right to Private Ownership and Establishment

There is little private ownership of land. Land reform
currently under consideration may result in more trade and
private ownership of property. Foreign investors are not
allowed to own land, but are granted lease rights ranging
up to 25 years, which can be later extended to 35 years for
investments over $10 million, or 50 years if 50 percent of
the company's shares are floated on the Maldives stock

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market. Leases can be renewed at the end of their terms,
but the formula for assessing compensation value of a
resort at the end of a lease has not yet been developed.
The government is looking at the possibility of extending
the initial lease period from 25 years to 50 years.

--Protection of Property Rights

Maldives lacks specific legislation to protect intellectual
property rights (IPR) and has not signed any related
international agreements or conventions. Maldives benefits
from the World Trade Organization (WTO) decision to extend
the transition period for least-developed countries (LDC)
to provide protection for intellectual property under the
Trade-Related Aspects of Intellectual Property Rights
(TRIPS) agreement until July 1, 2013.

--Efficient Capital Markets and Portfolio Investment

The financial sector in Maldives is narrow and dominated by
the banking sector. The banking sector consists of one
publicly owned commercial bank -- the Bank of Maldives --
and branches of four foreign-owned commercial banks. HSBC,
the only global bank present, set up operations in 2002.
Non-bank financial institutions in the country consist of
two insurance companies, a pension fund, and a finance
leasing company. All financial institutions currently
operate under the supervision of the Maldives Monetary
Authority, which acts as the central bank.

Local sources of finance are limited in scope because of
the small size of the capital market and the lack of
instruments that are available in more developed nations.
No financial instruments are offered to the public. The
commercial banks provide short- and long-term credit to the
private sector. No specialized financial institution
exists to meet the investment needs of tourism, agriculture
and fisheries. Non-performing loans are about 6 percent
and the risk-weighted capital adequacy ratio is high. Most
foreign currency loans are made to foreign currency-earning
tourist enterprises. The Maldives Monetary Authority has
introduced an emergency liquidity facility for commercial
banks. Banking supervision has been recently upgraded,
moving toward international best practices.

A small Securities Trading Floor (STF),opened in Male? in
2002 and performs the role of a stock exchange. In 2006,
the government took several steps to enhance the capital
market. The legislature passed a Securities Act in January
2006 and the government created a Capital Market
Development Authority (CMDA) to regulate the capital
market. The STF now functions under the CMDA. At present,
the only investment opportunity available to the public is
a limited number of shares in the Bank of Maldives and two
other state-owned public companies. A leasing company,
Maldives Finance Leasing Company (Pvt) Ltd (MFLC),was
established in May 2002 as a collaborative venture between
five domestic public and private sector entities and two
international parties including the World Bank?s
International Finance Corporation (IFC). The MFLC aims to
address the demand for long-term equipment financing from
all sectors of the economy. The Asian Development Bank
will support strengthening the financial sector to more
effectively mobilize savings and fund long-term
development.

The Housing Development Finance Corporation is a government
company designed to provide housing loans with long
repayment terms at favorable interest rates. The company
is also entrusted with drawing up the land use policy in
Maldives.

--Political Violence

Maldives has a homogeneous society of one culture, one
religion and one language. The current President has been

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in office since 1979. In 2004, the Government initiated a
process of constitutional reforms to address calls for
change and democracy. The President established a Special
Majlis (a special parliament separate from the People?s
Majlis) in May 2004 specifically to consider proposed
amendments to the constitution. Elections in January 2005
brought some reformists into parliament. In June of 2005,
Parliament legally recognized political parties.

Reformists complained that reform programs were slow and
insufficient. Opposition groups held demonstrations to
demand further reforms and request the release of political
prisoners in August and November 2005 and January 2006.
The demonstrations remained largely peaceful, although
after the first such protest in August, several people were
arrested and parliament was temporarily suspended. The
arrested demonstrators were later released without charge.

--Corruption

In 2002, parliament passed a bill on the prevention and
punishment of corruption. The law defines bribery and
improper pecuniary advantage and prescribes punishments.
The law also outlines procedures for the confiscation of
property and funds obtained through commission of the
included offenses. It broadens the mandate of the Anti-
Corruption Board, which previously extended only to
government employees, to investigate corruption in the
private sector.

--OPIC and Other Investment Insurance Programs

Currently, the Overseas Private Investment Corporation
(OPIC) does not operate in Maldives. Maldives is not a
member of the Multilateral Investment Guarantee Agency of
the World Bank Group.

--Labor

Skilled and unskilled labor can be scarce, and expatriate
labor is allowed in order to meet shortages. There are an
estimated 53,000 expatriate workers, mostly in tourism,
construction, and social and personal services. Expatriate
labor is equal to or more expensive than local labor. Even
when salaries are set lower, travel and other benefits
typically make it more expensive overall to hire
expatriates.

Wages in the private sector are usually set by contract
between employer and employee and are generally based on
rates for similar work in the public sector. Employment
contracts usually specify work hours on a weekly or monthly
basis. Employees are usually authorized 20 days of annual
leave, 30 days of medical leave, 45 days of maternity
leave, and 10 days of special annual leave for
"extraordinary circumstances." There are no laws governing
health and safety conditions; however, there are regulatory
requirements that employers provide a safe working
environment and ensure the observance of safety measures.

Maldives is not a member of the International Labor
Organization. Although unions are not expressly
prohibited, the government does not recognize the right to
form unions or the right to strike. Hence, labor actions
and disputes are rare. The United States in 1995 suspended
Maldives' eligibility for tariff preferences under the US
Generalized System of Preferences (GSP) because the
government failed to take steps to afford internationally
recognized worker rights to Maldivian workers. The
government has drafted new labor laws dealing with rights
of association, the right to organize, and acceptable
conditions of work, but passage of these laws has been
delayed by ongoing legal review.

--Foreign Direct Investment Statistics


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Foreign Investment: US firms represented in Maldives
include Western Union, FedEx, UPS, Hewlett Packard (HP),
Dell, Compaq, Coca-Cola, American Express, Hilton Resorts,
SeaTec, Ernst and Young, PricewaterhouseCoopers, and KPMG.

--Web Resources
Foreign Investment Services Bureau: www.investmaldives.org
International Monetary Fund: www.imf.org
World Bank: www.worldbank.org
Asian Development Bank: www.adb.org
Ministry of Planning and National Development:
www.planning.gov.mv
Maldives Monetary Authority: www.mma.gov.mv
Maldives Stock Market:
www.maldivesstockexchange.com.mv
United Nations Development Program: www.mv.undp.org

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