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DE RUEHLM #0251/01 0400947
ZNR UUUUU ZZH
R 090947Z FEB 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 5378
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
INFO RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0608
RUEHKA/AMEMBASSY DHAKA 9878
RUEHIL/AMEMBASSY ISLAMABAD 6825
RUEHKT/AMEMBASSY KATHMANDU 4895
RUEHKP/AMCONSUL KARACHI 2138
RUEHCG/AMCONSUL CHENNAI 7395
RUEHGV/USMISSION GENEVA 1789
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 07 COLOMBO 000251 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND SCA/INS 
 
STATE PLEASE PASS USTR 
 
E.O 12958: N/A 
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, 
 
SIPDIS 
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 
 
SIPDIS 
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. 
 
COLOMBO 00000251  002 OF 007 
 
 
 
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. 
 
COLOMBO 00000251  003 OF 007 
 
 
 
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 
 
COLOMBO 00000251  004 OF 007 
 
 
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 
 
COLOMBO 00000251  005 OF 007 
 
 
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 
 
COLOMBO 00000251  006 OF 007 
 
 
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 
 
 
COLOMBO 00000251  007 OF 007 
 
 
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 
 
BLAKE