INVESTMENT CLIMATE STATEMENT, 2009 - MALDIVES

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SUBJECT: INVESTMENT CLIMATE STATEMENT, 2009 - MALDIVES

REF:


1. Per reftel, below is the investment climate statement for
Maldives for 2009.

INVESTMENT CLIMATE STATEMENT-MALDIVES

JANUARY 2009

Investment Climate

--Introduction

Maldives is comprised of over 1,190 islands, of which 198 are
inhabited and 95 are exclusive resort islands. The population is
approximately 300,000, 103,000 of which live on the capital island
of Male'. There are an additional, on average, 80,000 expatriate
workers. More than 680,000 tourists arrive annually. In 2008 GDP
totaled around $1.2 billion, or about $3,900 per capita (far
exceeding the average of about $700 in the rest of South Asia).
Throughout the past decade, real GDP growth averaged around 6% per
year except for 2005, when GDP declined following the Indian Ocean
tsunami. GDP growth was 5.7% in 2008. Economic growth has been
powered mainly by tourism and its spin-offs in the transportation,
communication, and construction sector. Fishing remains an
important part of the economy as well. While income disparity
remains high, particularly between the capital and distant islands,
Maldives' growth has yielded considerable social progress. The net
enrollment in primary education is close to 100%. Literacy rates
are about 98%. Infant and maternal mortality are declining rapidly.


The Indian Ocean tsunami in December 2004 devastated many islands,
with damage estimated at $450 million. The Maldivian economy made a
remarkable recovery, with a rebound in tourism, the development of
new resorts, and post-tsunami reconstruction helping the economy in
the ensuing years. Nevertheless, recent growth, while significant,
has come at the cost of extremely high budget deficits and mounting
external debt. Since 2004, government spending has increased
rapidly. According to preliminary information, government
expenditure rose to an unprecedented 70% of GDP in 2008.
Consequently, the budget deficit expanded to 10% of GDP. The IMF
and other international donor agencies have urged the government to
return to fiscal prudence quickly to ensure economic stability.

2008 was a year of significant change in Maldives. The country
launched a new constitution and a series of new laws, including the
first comprehensive employment act. On October 8, 2008, Maldives
held its first multi-party Presidential election. The new
President, Mohamed Nasheed, has vowed to put the country's economic
and fiscal matters in order. He has also pledged to establish a
transportation network linking the islands of the country, bring
down the cost of living, provide affordable housing and healthcare,
and eliminate illegal narcotics.

It will take some time for the new government to settle in. There
are still significant gaps in the necessary legislation to implement
the reforms embodied in the new constitution. Parliamentary
elections due by mid-February 2009 under a constitutional deadline
have been delayed until May.

The government is expected to revise its 2009 budget -- passed in
late 2008 -- early in the year in an effort to reign in fiscal
control. The government is actively promoting foreign investment.
Meanwhile, the global economic crisis is likely to dampen economic
prospects for 2009. Tourism and fisheries, key economic sectors,
are challenged by the global recession.

The Maldives Monetary Authority (Central Bank) expects GDP growth
around 4.5% in 2009. Maldives' trade deficit has expanded sharply
in recent years as a result of high import prices for oil and
construction materials. In 2008, the trade deficit reached an
estimated $900 million. The deficit was partially offset by tourism
and government borrowing. The current account deficit was $637
million. The balance of payments recorded a deficit of about $72
million in 2008. Total external reserves stood at $241 million in
December 2008 (2.1 months of imports). External debt and debt

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service have risen rapidly in recent years. Total external public
debt was $477 million in 2008 and is likely to surpass $750 million
in 2009. A foreign exchange shortage affecting businesses was
reported as of March 2009.

Maldives is ranked 69 out of 181 countries in the World Bank's
(www.worldbank.org) Ease of Doing Business 2009 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),fourth in employing workers, and eighth in dealing with
construction licenses. But in terms of registering property,
getting credit, and closing a business, the country ranked lower, at
177, 145, and 123, respectively. Other rankings were as follows:
starting a business 38, protecting investors 70, trading across
borders 121, and enforcing contracts 90.

Maldives is seeking to postpone its "graduation" " from Least
Developed Country (LDC) status, currently scheduled for 2011. The
graduation would reduce the country's ability to access
concessionary trade and finance programs, and poses the threat of
demise of the fish export industry and the curtailment of foreign
aid.

Tourism will likely remain the engine of the economy. As many as
forty new resorts could open in the next few years, with at least
two planned openings in 2009.

In 2007, the government presented the Seventh National Development
Plan, which will guide development from 2006-2010. The plan
outlines Maldives' goals to further improve tourism, develop
infrastructure, improve social protection and modernize education to
achieve development goals. In 2008 Maldives plans to adopt a
regional development policy to improve atoll infrastructure and
services, and to consolidate populations to a few large population
centers.

The United Nations Development Program (UNDP) (www.mv.undp.org),the
World Bank (www.worldbank.org),and other multilateral and bilateral
donors are active in Maldives. They support government efforts to
improve education, health and nutrition, housing and social
protection, basic infrastructure, create employment opportunities,
environmental protection and improved governance. The United States
has friendly relations with Maldives.

--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. Invest Maldives Division (www.investmaldives.org)
and the Licensing and Regulations Division within the Ministry of
Economic Development are tasked with promoting and regulating
foreign investments respectively, with the notable exception of the
tourism sector. The Ministry of Economic Development reviews all
proposed investments prior to granting licenses. The Ministry of
Economic Development offers "one-stop shop" services to investors
and incentives including import duty concessions, 100% foreign
ownership, no restrictions on repatriation of earnings or profits,
and no foreign exchange restrictions. Foreign investments are
required to pay annual royalty fees to the government. The royalty
fee is 3% of gross income or 15 percent of profits, whichever is
greater, for majority foreign-owned companies. For others, the
royalty is 1.5 percent of income or 7.5 percent of profits,
whichever is greater. At present, personal income taxes are not
imposed. Banks' profits are taxed and a corporate profit tax is
under discussion. International arbitration is available for
dispute settlement. Foreign investments within the tourism sector -

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such as resorts - are registered with the Ministry of Tourism, Arts
and Culture.

The Ministry of Economic Development approves joint ventures in the
following sectors within ten working days of submitting required
documentation: financial consultancy, auditing, insurance, water
sports, commercial diving, domestic air transport, airline catering,
game fishing, technical support services, apparel manufacturing,
water bottling, cement, agencies, spa operators, water purification,
boat building, software development, ferry services, finance
leasing, fish processing, traditional medicine, underwater
photography, ice making, restaurants, valuation, flying schools and
IT services. Proposals for joint ventures in other sectors and
investments fully owned by foreigners are approved within 30 days.

The government hopes to privatize airports and harbors and develop
basic services such as water, sewerage systems, harbors, roads and
power utilities through public private partnerships.

The Ministry of Economic Development is looking for local and
foreign investors in media and broadcasting, entertainment industry,
utilities, infrastructure, health care facilities, hospital
management, regional airport management, and the development of
residential infrastructure (vacation homes).

The Ministry of Economic Development 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 following industries offer good 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.

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. Male' International Airport is the main
gateway to Maldives. In December 2007, the airport in Gan Island in
the south was upgraded to accommodate international flights. Of the
198 inhabited islands in the Maldives, 105 have harbors. Other key
priorities in the transport sector are the expansion of the Male'
Airport and the Male' Commercial Harbor, the development of a
transshipment port, a bridge connecting the capital city Male' with
the airport island Hulhumale, and a new commercial port in the Male'
region.

Population Consolidation: The government is planning two major
development plans in the area of population consolidation. 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 airort is located.

Telecommunications and information technology also offer potential
opportunities.

Power: Currently, virtually all electricity is provided by diesel
generators. Tourist resorts consume about 60 percent of electricity
used in the Maldives. There is scope to provide renewable sources
such as solar, wind and biomass for energy needs; pilot projects in
these areas are underway on some islands.

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


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--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, although tourism receipts help
maintain hard currency liquidity. A foreign exchange shortage
affecting businesses was reported as of March 2009.
Large fiscal deficits financed by the Maldives Monetary Authority
(www.mma.gov.mv) pose a potential threat to the fixed exchange rate
system.

Foreign reserves at the end of December 2008 were $241 million, down
from $309 million in 2007, and were sufficient to finance 2.1 months
of imports.

The government has taken initial action to introduce a new public
accounting system. A new Public Finance Law, an Audit Law and a
Civil Service Law came into force in 2006-2007. Legislation on
Anti-Money Laundering and Combating Terrorist Financing has been
drafted.

--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. The Judicial Services Commission (JSC) is
responsible for nominating, dismissing, and examining the conduct of
all judges.

A Supreme Court was established for the first time in 2008 under the
new Maldives Constitution. The Supreme Court is the highest
judicial authority in Maldives. In addition to the Supreme Court,
there are four courts in Male': a high court, civil court, criminal
court, and a family and juvenile court. There are approximately 200
magistrate courts, one in each inhabited island. The Supreme Court
serves as court of appeal. There are no jury trials. Though legal
procedures are adequate, the judicial process is slow.

Pursuant to the new constitution, a prosecutor general was appointed
in September 2008. The prosecutor general is tasked with the
prosecution of criminal offences. The Attorney General acts as the
legal advisor to the government and represents the government in all
courts except on criminal proceedings represented by the prosecutor
general.

The law on foreign investments guarantees the security of

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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 (parliament) 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% of the company's shares are floated on the Maldives stock
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
99 years.

--Protection of Property Rights

Currently, Maldives lacks specific legislation to protect
intellectual property rights (IPR) and has not signed any related
international agreements or conventions. An IPR law is awaiting
parliamentary approval. Maldives recently established an IPR unit
within the Ministry of Economic Development. 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. The Maldives Monetary Authority Act
was amended in 2007 to ensure independence of the Authority.

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. The government commenced
treasury bill auctions in 2006. Other types of financial instruments
are not 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 fell to
2.4% of total loans in 2006 from about 6.7% in 2005 due to a
recovery in tourism and to improved banking supervision. Most
foreign currency loans are made to foreign currency-earning tourist
enterprises. Banking supervision has recently been upgraded, moving
toward international best practices.

A small Securities Trading Floor (STF) opened in Male' in 2002 and
was licensed as a private stock exchange in 2008. 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 three
other state-owned public companies. A leasing company, Maldives

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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 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. In 2008, Maldives held its first multi-party
Presidential elections, following a multi-year effort for
constitutional reforms. President Nasheed took office in November
2008, replacing a thirty-year incumbent. The transition to a new
government led by the former head of the opposition was peaceful.
Political rallies in Maldives generally do not turn violent, as
sometimes occurred under the previous regime.

Religious extremism, involving espousal of fundamentalist views
incompatible with Maldives' generally moderate Islamic practices, is
a growing trend. In September 2007, Maldives experienced its
first-ever terrorist attack when a bomb exploded in the capital of
Male', injuring twelve tourists, who appeared to be the target of
the attack.

--Corruption

Corruption is a serious problem in Maldives, and the new government
has vowed to fight it. The World Bank's Control of Corruption Index
for Maldives shows a steady decline in recent years from +0.06 in
2003 to -0.15 in 2004, -0.32 in 2005, -0.51 in 2006 and -0.78 2007.
Transparency International's Corruption Perception Index surveyed
Maldives for the first time in its 2007 index and Maldives ranked 84
with a score of 3.3 out of a possible 10. In 2008, Maldives slipped
31 places and ranked 115 out of 180 countries with a score of 2.8.

The law on prevention and punishment of corruption (2002) 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. An
Anti-Corruption Commission was created in December 2008 following
the passage of the Anti Corruption Commission Act. The
responsibilities of the Commission include inquiring into and
investigating all allegations of corruption; to recommend further
inquiries and investigations by other investigatory bodies; and to
recommend prosecution of alleged offences to the Prosecutor General,
where warranted. The Anti-Corruption Commission is empowered to
handle cases of corruption of members of parliament. It cannot
investigate corruption in the private sector.

In March 2007, the Maldives acceded to the United Nations Conventon
against Corruption.

--OPIC and Other Invesment Insurance Programs

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

--Labor

Skilled and unskilled labor is scarce, and expatriate labor is
allowed in order to meet shortages. There are an estimated 80,000
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. Since higher education options in Maldives are
limited, young Maldivians from higher income families often travel
abroad for education.

The laws covering labor were overhauled in 2008 with the enactment

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of the 2008 Maldives Constitution, the new Employment Act, and a
subsequent amendment to the Employment Act. The new constitution
recognizes the workers' right to strike and establish trade unions,
for the first time. Maldives is hoping to enact a separate trade
union law providing rules for formation of trade unions and
collective bargaining.

The Employment Act provides for the establishment of minimum wages,
maximum hours of work, overtime, annual and sick leave, maternity
leave and work place safety.

The Employment Act created a 48-hour/week with a compulsory 24-hour
break after six days of continuous work. Resort workers may
accumulate the weekly rest day. Overtime is available. Workers in
tourist resorts may work additional two hours a day and paid at
overtime rate. Employees are usually authorized 30 days of annual
leave, 30 days of medical leave, 65 days of maternity leave, and 10
days of special annual leave to "attend important obligations."
Either parent of a newborn child is entitled to one year's unpaid
annual leave after the expiry of the maternity leave period.
Employers are also required to provide a safe workplace. The law
provides for entering into of agreements between the employer and
the employee which guarantees the rights specified in the law.

Until recently, the government did not recognize the right to form
unions or the right to strike. Hence, labor actions and disputes
were rare. While no labor unions yet exist, collective bargaining
involving employees' associations in the tourism sector began within
days of the new constitution taking effect. Labor disputes arose in
some resorts when employees' associations presented demands for wage
increases and improvements in the conditions of work and stopped
work.

Traditionally, wages in the private sector have been set by a
contract between employers and employees and were based on rates for
similar work in the public sector. The new employment law
established a Pay Advisory Board to advise the Minister of Human
Resources, Youth and Employment on setting minimum wages in the
private sector.

The Employment Act granted workers the right to compensation if
fired without cause. The government has established a Labor
Relations Authority to implement the new employment law. The law
requires the Ministry of Human Resources to issue specific rules for
employment of foreign workers.

The Employment Act does not cover emergency workers, air and sea
crews, executive staff of any company and persons on on-call duty.

In December 2008, following the enactment of the new Employment Act,
Maldives became a member of the International Labor Organization.
In 1995, the United States suspended Maldives' eligibility for
tariff preferences under the US Generalized System of Preferences
(GSP) because the Maldives did not have a mechanism to afford
internationally recognized worker rights to Maldivian workers.

--Foreign Direct Investment Statistics

Foreign Investment: US firms represented in Maldives include Western
Union, FedEx, UPS, Hewlett Packard (HP),Dell, Compaq, Coca-Cola,
American Express, Hilton Resorts, Sheraton, 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
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