VZCZCXRO0850
RR RUEHLMC
DE RUEHLM #0058/01 0140257
ZNR UUUUU ZZH
R 140257Z JAN 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7495
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
INFO RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1715
RUEHKA/AMEMBASSY DHAKA 0635
RUEHIL/AMEMBASSY ISLAMABAD 7623
RUEHKT/AMEMBASSY KATHMANDU 5803
RUEHKP/AMCONSUL KARACHI 2269
RUEHCG/AMCONSUL CHENNAI 8229
RUEHGV/USMISSION GENEVA 2533
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 07 COLOMBO 000058 
 
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, 2008 - MALDIVES 
 
REF: 2007 STATE 158802 
 
¶1.  Per reftel, below is the investment climate statement for 
Maldives for 2008. 
 
INVESTMENT CLIMATE STATEMENT-MALDIVES 
 
FEBRUARY 2008 
 
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 
about 350,000, while over 700,000 tourists arrive annually.  The 
capital, Male', has a population of 103,000.  GDP in 2007 totaled 
about $1 billion, 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% 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 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; 
damage was estimated at $450 million.  Yet the Maldivian economy has 
made a remarkable recovery from the tsunami.  A rebound in tourism, 
development of new resorts, and post-tsunami reconstruction helped 
the economy in the ensuing years.  In 2006 GDP growth was 19% 
following tsunami reconstruction-driven growth of 45% in 2005. 
Growth returned to normal levels of about 7% in 2007.  Growth is 
expected to continue in 2008, at about 8%, fueled by tsunami 
reconstruction, government spending, new resort construction and 
tourism. 
 
Recent growth, while remarkable, has come at the cost of extremely 
high budget deficits and mounting external debt.  Since 2004, 
government spending has increased rapidly due to tsunami 
reconstruction and higher social and capital investment.  According 
to preliminary information, Government expenditure rose to an 
unprecedented 50% of GDP in 2007.  Consequently, the budget deficit, 
which was 1.6% of GDP before the tsunami, expanded to 20% of GDP. 
In 2008, Government expenditure is set to rise further.  Government 
revenue comes mainly from tourism and import tariffs.  Foreign aid 
is also a major funding source of the budget.  The government has 
borrowed heavily from the Maldives Monetary Authority and foreign 
sources to meet the 2007 deficit.  Inflation has increased to over 
5% in 2007 compared with approximately 3.5% in 2006.  IMF and other 
international donor agencies have urged the government to return to 
fiscal prudence quickly to ensure future economic stability. 
 
Maldives' trade deficit has expanded sharply in recent years as a 
result of high oil prices and import of construction materials.  In 
2007, the trade deficit reached an estimated $700 million.  However, 
due to increased tourism and government borrowing, the balance of 
payments recorded a surplus of about $45 million for the second 
straight year.  External debt and debt service have risen rapidly in 
recent years.  Total external debt is likely to surpass $700 million 
in 2007 (about 67% of GDP), more than double the level in 2004. 
 
Maldives has recently applied to Standard and Poor's credit rating 
agency for an international credit rating. 
 
Maldives is ranked 60 out of 178 countries in the World Bank's 
(www.worldbank.org) Ease of Doing Business 2008 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), seventh in employing workers, and eighth in dealing with 
licenses.  But in terms of registering property, getting credit, and 
closing a business, the country ranked lower, at 178, 135, and 120, 
respectively.  Other ranks were as follows: Starting a business 34, 
protecting investors 64, trading across borders 110, and enforcing 
 
COLOMBO 00000058  002 OF 007 
 
 
contracts 94. 
 
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 two years.  The government 
hopes to expand existing airports and build new ones to cater to 
increased tourism.  Other plans include increasing capacity of 
ports. 
 
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.  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 2008. 
 
--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, with the notable exception of the tourism sector.  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% 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 consideration for the 
end of the decade.  International arbitration is available for 
dispute settlement.  Foreign investments within the tourism sector - 
such as resorts - are registered with the Ministry of Civil Aviation 
and Tourism. 
 
The FISB 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, and valuation.  Proposals for joint ventures in other 
sectors and investments fully owned by foreigners are approved 
within 30 days. 
 
 
COLOMBO 00000058  003 OF 007 
 
 
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. 
 
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:  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. 
 
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. 
 
 
--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. 
 
Foreign reserves at the end of October 2007 were $266 million, up 
from $232 million in 2005, and were sufficient to finance 3.1 months 
 
COLOMBO 00000058  004 OF 007 
 
 
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.  In November 2005 the government announced the 
creation of a ten-member Judicial Services Commission (JSC) 
responsible for nominating, dismissing, and examining the conduct of 
all judges; however, the JSC was not yet fully functional by the end 
of 2007.  There are four courts in Male':  a high court, civil 
court, criminal court, and a family and juvenile court.  In 
addition, there are approximately 200 magistrate courts, one in each 
inhabited island.  The High Court serves as court of appeal and also 
handles any politically sensitive cases.  There are no jury trials. 
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 (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 
50 years. 
 
 
COLOMBO 00000058  005 OF 007 
 
 
--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.  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.  The Maldives Monetary Authority has introduced an 
emergency liquidity facility for commercial banks.  Banking 
supervision has recently been 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 three 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 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 an homogeneous society of one culture, one religion and 
one language.  The current President has been 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.  In 2008, Maldives will have 
its first multi-party Presidential elections. 
 
Reformists complain 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 
 
COLOMBO 00000058  006 OF 007 
 
 
people were arrested and parliament was temporarily suspended.  The 
arrested demonstrators were later released without charge. 
 
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 problem in Maldives.  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 and -0.51 in 
¶2006.  Transparency International's Corruption Perception Index 
surveyed Maldives for the first time in its 2007 index.  Maldives 
ranked 84 out of 179 countries with a score of 3.3 out of a possible 
¶10. 
 
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 is scarce, and expatriate labor is 
allowed in order to meet shortages.  There are an estimated 67,000 
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.  Because, higher education options in Maldives are 
limited, young Maldivians from higher-income families often travel 
abroad for education.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 
 
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 
 
 
COLOMBO 00000058  007 OF 007 
 
 
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