US embassy cable - 03COLOMBO1540

UNCLAS SECTION 01 OF 05 COLOMBO 001540 
 
SIPDIS 
 
DEPT FOR EB/IFD/OIA, SA/INS, EB CBA 
DEPT PLEASE PASS TO USTR, EXIM, TDA 
Manila for USADB 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ELAB, ETRD, KTDB, PGOV, MV, OPIC, ECONOMICS 
SUBJECT: INVESTMENT CLIMATE STATEMENT FOR MALDIVES, 
SEPTEMBER 2003 
 
REF:  STATE 128494 
 
1.  The following is the 2004 Investment Climate 
Statement for the Republic of Maldives.  This 
statement will be included in the Post's FY 2004 
Maldives Country Commercial to be sent separately. 
 
Begin text. 
 
INVESTMENT CLIMATE STATEMENT 
MALDIVES, SEPTEMBER 2003. 
 
Openness to Foreign Investment 
------------------------------ 
 
2.  The Republic of Maldives is made up of over 1,190 
islands, of which 200 are inhabited and 87 are 
exclusive resort islands. The local population is 
about 280,000, and 470,000 tourists arrive annually. 
Between 1997 and 2002, the annual economic growth rate 
averaged 7.0 percent, powered mainly by growth in 
tourism and its spin-offs in transport, communication, 
and construction. 
 
3.  In the recent decades since tourism was 
introduced, the Maldives has welcomed foreign 
investment.  The lack of codified law and of a 
predictable investment framework had, over time, 
dampened investor interest.  This began to change with 
the passage of laws on foreign investment and the 
creation of institutions to deal with investment.  The 
government of the Republic of Maldives introduced a 
Foreign Investment Services Bureau (FISB) in 1987, 
(www.investmaldives.com), within the Ministry of 
Trade, Industries and Labor.  The FISB offers "one- 
stop shop" services to investors, and incentives, such 
as allowing 100 percent foreign ownership, duty 
exemptions and no exchange controls or restrictions on 
repatriation of profits.  At present, personal income 
taxes are not imposed, though banks' profits are taxed 
and a corporate profit tax is under consideration for 
the end of the decade. Domestic and international 
arbitration is available for dispute settlement. 
 
4.  Foreign investment is governed by Law 25/79, 
passed in 1979, which provides for an agreement 
between the government and an investor setting out 
terms and conditions.  A 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.  Foreign 
investors will qualify for import duty concessions as 
specified by the FISB. 
 
5.  Currently there are several foreign investments in 
the Maldives, primarily in resort management, but also 
in accounting services, banking, telecommunications, 
air transport, courier services, and manufacturing. 
 
6.  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 several industries 
that offer potential for investors, which are 
summarized below. 
 
Fisheries- fish processing is an attractive sector for 
foreign investment, particularly for new technology 
and capital investment.  Opportunities also exist for 
marine product development, aquaculture including 
tropical fish farming and cultivation of seaweed, 
lobster, shrimp, reef fish and crab. 
 
Financial- banking, accounting, and management 
consulting. The FISB is interested in bringing in more 
global banks (only HSBC is currently present).  The 
present lack of adequate banking laws has deterred 
entry. 
 
Transport and other services- development of air and 
sea transport including inter-atoll transport 
services, bunkering, transshipment, and passenger 
cruises. 
 
Infrastructure development- harbors and tourist 
resorts, residential/retirement islands for 
foreigners, health resorts, and time sharing plans. 
There are two major development plans in the 
government's docket.  The first is a consolidation of 
services and infrastructure of the 20 atolls around 
five regional centers, two of which have already been 
established.  The second is a capital project to 
alleviate overcrowding in Male'.  Already reclamation 
and development of Hulhumale Island near Male' has 
commenced.  Hulhumale will house 50,000 people when 
the project is completed in 30 years; 250 housing 
units will be completed by the end of 2003.  The 
island, which will eventually will be physically 
linked to the airport island and will offer 125 acres 
of duty-free shopping in a bid to increase the 
Maldives' attraction for tourists.  There will be 
opportunities in civil works in the above construction 
projects, road and bridge construction, domestic 
airport development, and seaport development. 
 
Other sectors with potential include: 
 
Tourism:  opportunities exist in the entire range of 
services, including development and management of 
resorts, tourist activities, and land and sea 
transportation. 
 
Telecommunications:  Currently, Dhiraagu, jointly 
owned by Cable and Wireless and the Government of 
Maldives has a monopoly over telecommunications.  A 
second cellular provider is expected to begin 
operations in early 2004.  Discussions for a second 
ISP are underway, and Dhiraagu will be privatized 
starting in 2008. 
 
Information Technology: The FISB would like to 
establish a "technology island" of sorts for software 
development and other IT activities.  While the 
connectivity infrastructure is not yet in place to 
support such an operation, it is felt that the 
Maldives' climate, surroundings and pace of life would 
be attractive to software developers. 
 
Petroleum exploration; marine-based agriculture; 
handicrafts; export-oriented manufacturing, health 
services, tele-medicine, educational services, 
horticulture. 
 
Sectors closed to investment: Trading (i.e., shipping 
and transport of goods) and the production of any 
items illegal to import into the Maldives (most 
notably alcohol). 
 
Conversion and Transfer Policies 
-------------------------------- 
 
7.  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 money changers, and major credit 
cards and traveler's checks are accepted by hotels and 
banks.  Foreign-currency accounts are available in 
banks.  The US dollar is the most widely used foreign 
currency, and is accepted by small shops and taxi 
drivers in Male'. 
 
8.  The official exchange rate is set at 12.75 
Ruffiyaa to the dollar.  The currency underwent an 8.3 
percent devaluation in 2001 after staying at 11.77 
Rufiyaa to the dollar for several years.  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 management of exchange rate. 
Businesses have occasionally reported hard currency 
shortages and difficulty obtaining dollars at banks. 
9.  Foreign reserves at end of 2002 were $135 million 
or about 4.1 months of imports compared with $95 
million or about 3.1 months of imports at the end of 
2001. 
 
Expropriation and Compensation 
------------------------------ 
 
10.  According to the Law on Foreign Investment, the 
Government may, with or without any given 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 in the 
interest of national security.  Temporary closure 
would not lead to Government of Maldives or Maldivian 
nationals incurring any liabilities.  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 
the Maldives then the Government will pay fair 
compensation.  Capital belonging to an investment that 
is closed for the above reasons are permitted to be 
taken out of the country in a mutually agreed manner. 
There does not appear to be any risk of expropriation 
in the near future. 
 
Dispute Settlement 
------------------ 
 
11.  The sources of law in the Maldives are its 
constitution, Islamic Sharia law and international 
law.  Judicial matters are referred to Courts in Male' 
or on other islands presided over by Magistrates.  The 
High Court of Justice, headed by the Chief Justice, is 
the highest court.  There is also the right to appeal 
to the President in the event of dissatisfaction with 
the decision of the High Court.  Though legal 
practices are adequate with a number of overseas- 
trained lawyers, the judicial process is slow.  The 
law on foreign investments guarantees the security of 
investments.  Disputes involving investments below $1 
million can be referred to the courts of law in the 
Maldives.  Disputes over $1 million can be referred 
for international arbitration. 
 
12.  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 Majilis 
legislative body has enacted a number of commercial 
laws, including the law of contract, the Negotiable 
Instruments of Law, and the Companies Act, and amended 
the tourism law to conditionally extend the 25-year 
resort lease period to 50 years. 
 
13.  The Republic of Maldives is not a member of the 
International Center for the Settlement of Investment 
Disputes (ICSID). 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
14.  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 trading floor. 
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. 
 
Protection of Property Rights 
----------------------------- 
15.  The Maldives lacks specific legislation to 
protect intellectual property rights (IPR) and has not 
signed on to international agreements and conventions. 
The Government is seeking assistance from the World 
Intellectual Property Organization (WIPO) to develop 
IPR laws and regulations.  Consumers of computer 
software reportedly appreciate the value of genuine 
products, as pirated software programs often contain 
bugs and viruses. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
16.  The financial services sector in the Maldives is 
not particularly well-developed or sophisticated.  The 
banking system consists of the Maldives Monetary 
Authority which acts as the Central Bank, and five 
commercial banks.  HSBC, the only global bank present, 
set up operations in 2002.  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.  Certificates of 
Deposits are the only instruments to absorb excess 
liquidity from Commercial banks.  There are no 
financial instruments on offer to the public sector. 
The commercial banks provide short term and long term 
credit to private sector.  No specialized financial 
institution exists to meet the investment needs of 
tourism, agriculture and fisheries.  Non-performing 
loans are about 10 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. 
 
17.  There are no organizations such as a Securities 
Exchange Commission, though it is contemplated for the 
future.  A small trading floor opened in the Maldives 
in April 2002.  There are hopes that the stock 
exchange will facilitate the development of a capital 
market.  A leasing company was formed in 2001 with 
private and public investment and support from the 
International Finance Corporation.  The Asian 
Development Bank will support strengthening the 
financial sector to more effectively mobilize savings 
and fund long term development. 
 
Political Violence 
------------------ 
 
18.  The Maldives has a strong record of political 
stability resulting from the homogenous nature of a 
society of one culture, one religion and one language. 
Ethnic and political unrest that can disrupt economic 
activities is rarely experienced in the Maldives.  The 
current President has been in office since 1979. 
 
Corruption 
---------- 
 
19.  An anticorruption board has the authority to 
investigate corruption related to government 
employees.  From 1990-2000, the board received 480 
complaints.  The board has fined employees in 111 
cases. 
 
OPIC and Other Insurance Programs 
--------------------------------- 
 
20.  Currently, OPIC does not operate in the Maldives. 
The Maldives is also not a member of the Multilateral 
Investment Guarantee Agency of the World Bank Group. 
 
Labor 
----- 
 
21.  Trained, as well as unskilled, labor can be 
scarce and expatriate labor is allowed in order to 
meet shortages.  There are an estimated 30,700 
expatriate workers, mostly in tourism, construction 
and social and personal services, holding skilled and 
unskilled jobs.  Using expatriate labor is equally or 
more expensive than local labor.  Salaries are lower 
but travel and benefit costs make overall costs 
higher. 
 
22.  Wages in the private sector are usually set by 
contract between employer and employee and are usually 
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' 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. 
 
23.  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 US Government in 1995 
suspended the Maldives' eligibility for tariff 
preferences under the US Generalized System of 
Preferences because the Government failed to take 
steps to afford internationally recognized worker 
rights to Maldivian workers.  The Government--with 
assistance from the International Labor Organization-- 
has drafted proposed new labor laws dealing with 
rights of association, the right to organize, and 
acceptable conditions of work but the Government has 
not taken any action to implement the laws. 
 
24.  Foreign Investment:  US firms represented in the 
Maldives include Western Union, FedEx, UPS, Hewlett 
Packard (HP), Gateway, Dell, Compaq, Coca-Cola, 
American Express, Hilton resorts, SeaTec, Ernst and 
Young, Price Waterhouse Coopers and KPMG. 
LUNSTEAD