US embassy cable - 05COLOMBO500

UNCLAS SECTION 01 OF 07 COLOMBO 000500 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND SA/INS 
STATE PASS USTR 
STATE PASS OPIC, TDA, EXIM 
 
TREASURY FOR DO/GCHRISTOPOLUS 
 
USDOC FOR ITA/ATAYLOR 
 
E.O 12958:N/A 
TAGS: EINV, EFIN, ETRD, ELAB, KTDB, PGOV, ECON, MV, Maldives 
SUBJECT: IMI - INVESTMENT CLIMATE STATEMENT 2005 - MALDIVES 
 
REF: (A) 04 STATE 269486 (B) 04 STATE 250356 
 
1.  THE FOLLOWING IS THE INVESTMENT CLIMATE STATEMENT 
FOR MALDIVES FOR 2005. 
 
INVESTMENT CLIMATE STATEMENT 
 
MALDIVES 
 
FEBRUARY 2005 
 
OPENNESS TO FOREIGN INVESTMENT 
------------------------------ 
 
2.  Maldives is made up of over 1,190 islands, of 
which 198 are inhabited and 87 are exclusive resort 
islands.  The local population is about 285,000, and 
over 600,000 tourists arrive annually.  Over the past 
decade, real GDP growth averaged over 7.5 percent per 
year, powered mainly by growth in tourism and its 
spin-offs in transport, communication, and construction. 
 
3.  The Asian tsunami in December 2004 caused 
extensive economic losses to Maldives.  Total damages 
are estimated at around $470 million -- close to 62 
percent of GDP.  Most losses were concentrated in 
housing and tourism, with education, fisheries, and 
transport also heavily affected.  Twenty inhabited 
islands were destroyed.  A few resort islands also 
suffered extensive damage.  Loss of life in the 
Maldives, however, was relatively low compared to 
other countries.  An assessment by the multilateral 
development banks estimates Maldives will need about 
$304 million to implement a recovery and reconstruction 
strategy.  Tourism will remain the main driver of the 
economy in the post tsunami era, and tourism's recovery 
will be critical for Maldives to again achieve high 
growth rates.  The island resorts, for the most part, 
experienced only minor damage and Maldives has already 
begun to market its status as a unique tourist destination 
intensively.  Donor agencies forecast GDP growth will slow 
to 1 percent in 2005 compared with a pre-tsunami forecast 
of 7.5 percent.  The main donor agencies have indicated 
their commitment to help Maldives in reconstruction.  All 
reconstruction assistance in Maldives will be channeled 
through a Tsunami Relief and Reconstruction Fund set up 
by the Government.  There may be commercial opportunities 
especially in the construction sector and in the supply 
of equipment in the post tsunami recovery program. 
 
4.  In the recent decades, Maldives has welcomed 
foreign investment.  The lack of codified law and 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, 
within the Ministry of Trade and Industries.  Still 
the lack of a strong legal and procedural regime for 
investment and an over-reliance on negotiations makes 
the job of the FISB difficult and presents an added 
risk for investors.  The FISB offers "one-stop shop" 
services to investors, and incentives, such as 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. 
 
5.  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 qualify for import duty concessions as 
specified by the FISB. 
 
6.  The FISB plans to amend Law 25/79 with the help of 
the Foreign Investment Advisory Service (FIAS) of the 
World Bank Group to make foreign investment more 
transparent and speed up the approval process. 
Changes will include a licensing process whereby 
investors in FIAS-identified approved investment areas 
will be automatically issued a license.  Investment in 
"restricted" and "approval with restrictions" areas 
will be reviewed by a Foreign Investment Board, which 
would be composed of government representatives, 
before licenses can be granted.  Licenses will not have 
the time restrictions currently imposed on contracts. 
 
7.  Currently there are several foreign investments in 
Maldives, primarily in resort management, but also in 
accounting services, banking, telecommunications, air 
transport, courier services, and manufacturing. 
 
8.  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 open to foreign 
investment, particularly for new technology and 
capital investment.  Opportunities also exist for 
marine product development and 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.  The 11 new resorts to open in 2005-2006 will 
also require transportation options from tourist 
arrival locations.  The FISB plans to create a 
transshipment port in the north of the country for 
cargo bound for the east coast of India.  Private 
funding is currently being sought, and construction 
should begin in 2005. 
 
Infrastructure development- harbors and tourist 
resorts, residential/retirement islands for 
foreigners, health resorts, and time-share 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'.  Reclamation and 
development of Hulhumale Island near Male' has already 
commenced.  Hulhumale will house 50,000 people when 
the first stage of the project is completed in 30 
years and 150,000 when all three stages are complete. 
Currently 1,000 people are in residence on the 465 
acres of reclaimed land.  Basic amenities, such as 
electricity, water and telecommunications, are being 
provided by the government at the same rates as Male'. 
The island eventually will be linked to the airport 
island via bridge and will offer 125 acres of duty- 
free shopping in a bid to increase 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.  The government 
is also currently funding harbor-dredging projects for 
103 islands on a contract basis. 
 
9.  Other sectors with potential opportunities include: 
Tourism:  Opportunities exist in the entire range of 
services, including development and management of 
resorts, tourist activities, and land and sea 
transportation.  The Government is reviewing bids for 
the development of 11 new resort islands. 
Telecommunications:  Currently, Dhiraagu, jointly 
owned by Cable and Wireless and the Government of 
Maldives, is the main provide of telecommunications 
services.  Their monopoly on cellular services will 
end soon when Wataniya International of Kuwait 
commences operations in July 2005.  There are two ISP 
providers: Focus Computers and Dhiraagu. 
 
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 Maldives' 
climate, surroundings and pace of life would be 
attractive to software developers. 
 
Other sectors include petroleum exploration; marine- 
based agriculture; handicrafts; export-oriented 
manufacturing, health services, tele-medicine, 
educational services, horticulture. 
 
10.  Sectors closed to investment: trading (i.e., 
shipping and transport of goods) and the production of 
any items illegal to import into Maldives. 
 
CONVERSION AND TRANSFER POLICIES 
-------------------------------- 
 
11.  There are no exchange controls or restrictions on 
currency movements.  Repatriation of funds and profits 
is allowed, after local debts are settled. 
 
12.  Major international currencies can be bought and 
sold at banks and authorized moneychangers.  Hotels 
and banks accept major credit cards and traveler's 
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'. 
 
13.  The official exchange rate is set at 12.8 Rufiyaa 
to the dollar.  The currency underwent a nine percent 
devaluation in July 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, though 
tourist receipts help maintain hard currency 
liquidity.  During 2001-2002, businesses reported hard 
currency shortages and difficulty obtaining dollars at 
banks.  Large fiscal deficits financed by Maldives 
Monetary Authority posed a potential threat to the 
fixed exchange rate system, and so the Government took 
steps to achieve fiscal consolidation during 2003, in 
part by expenditure control.  Fiscal Deficit was 4.1 
percent of GDP and 4.4 percent of GDP in 2003 and 2004 
respectively.  The Government intends that domestic 
financing of future deficits be carried out only by 
market sale of securities. 
 
14.  To enable more comprehensive and up-to-date 
control over public expenditures, initial actions have 
been taken to introduce a new public accounting 
system.  Draft bills have been processed and are 
awaiting the endorsement of the President's Office 
before submission to the People's Majlis (Parliament), 
including a public finance bill, a public enterprise 
accountability bill, as well as amendments to the 
Audit Bill.  The Government has also taken steps to 
expand the tax base and is planning to enact a 
business profit tax and a property rental value tax. 
Foreign reserves at end of 2004 were $205 million, and 
were sufficient to finance 4.5 months of imports. 
EXPROPRIATION AND COMPENSATION 
------------------------------ 
 
15.  According to the Law on Foreign Investment 
(25/79) 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.  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 
fair 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 
does not appear to be any risk of expropriation in the 
near future. 
 
DISPUTE SETTLEMENT 
------------------ 
 
16.  The sources of law in Maldives are its 
constitution, Islamic Sharia law, international law, 
and English common law, with the latter being more 
influential in some areas, such as commercial law. 
Judges are appointed by the President and must be 
Muslims.  There is a High Court in Male' and lesser 
courts, of a 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.  Ultimate appeal lies 
with the President. 
 
17.  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 Maldives.  Disputes over $1 million 
can be referred for international arbitration. 
 
18.  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 
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.  Maldives is not a 
member of the International Center for the Settlement 
of Investment Disputes (ICSID). 
 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
-------------------------------------------- 
 
19.  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 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 
----------------------------- 
 
20.  Maldives lacks specific legislation to protect 
intellectual property rights (IPR) and has not signed 
on to international agreements and conventions, 
although it intends to comply with the provisions of 
the Trade-Related Aspects of Intellectual Property 
Rights (TRIPS) Agreement by end 2005.   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 
--------------------------------------------- ----- 
 
21.  The financial sector in Maldives is very narrow 
and dominated by the banking sector.  The banking 
sector consists of one publicly owned commercial bank 
-- the Bank of Maldives Plc -- 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 provident fund and a finance 
leasing company.  All financial institutions currently 
operate under the supervision of Maldives Monetary 
Authority, which acts as the Central Bank. 
 
22.  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- 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. 
 
23.  The development of a stock market has been a 
policy objective of the Government of Maldives since 
the late 1990s and has been integrated in consecutive 
National Development Plans.  As there is currently no 
organized capital market in Maldives, the Capital 
Market Development Section (CMDS) of the MMA is 
working towards creating the institutional mechanism 
to facilitate an organized market for raising capital 
required by the economy.  A proposed Securities Bill 
would make provisions for the establishment of a 
regulatory framework for the capital market, the 
proposed capital market institutions and the licensing 
of financial intermediaries for the purpose of 
developing and regulating a capital market in 
Maldives. A small trading floor opened in Male' in 
April 2002 within the capital development department 
of the MMA.  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 - Maldives Transport and 
Contracting Company (MTCC) and the State Trading 
Organization (STO).  There are plans to move to daily 
trading and expand into the islands, and the MMA is 
conducting an investor education program. There are 
hopes that the stock exchange will facilitate the 
development of a capital market.  A leasing company, 
Maldives Finance Leasing Company Pvt. Ltd. was 
established in May 2002 as a collaborative venture 
between five domestic public and private sector 
entities and two international parties, in order 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. 
24.  The newly formed Housing Development Finance 
Corporation is a government company designed to 
provide public housing loans with long repayment terms 
at favorable interest rates.  The Company is also 
entrusted with drawing up the policy that plans and 
facilitates the use of land as an asset in Maldives, 
and to bring the necessary changes and the subsequent 
development of economic and financial mechanisms in 
the country, to incorporate this policy. 
 
POLITICAL VIOLENCE 
------------------ 
 
25.  Maldives has a strong record of political 
stability resulting from the homogeneous nature of a 
society of one culture, one religion and one language, 
as well as the absence of political parties.  The 
current President has been in office since 1979.  The 
Government has begun a process of constitutional 
reforms to address recent calls for change and 
democracy.  A Special Majilis (parliament) was 
established in May 2004 specifically to consider 
proposed amendments to the constitution.  Reformists 
complain that reform programs are slow and 
insufficient.  Rioting in September 2003 and August 
2004 prompted the government to declare a state of 
emergency, which remained in effect for two months, 
and led to the detention of dozens of citizens 
including some members of the Special Majilis and the 
People's Majilis.  They were released in December 
2004.  Parliamentary elections in January 2005 saw 
some reformists entering Parliament.  Following the 
elections, the President presented detailed proposals 
for constitutional reform to the Parliament. 
 
CORRUPTION 
---------- 
 
26.  In 2002, Parliament passed a bill on the 
prevention and punishment of corruption.  The 
provisions of the law cover definitions of bribery and 
improper pecuniary advantage and prescribe 
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 INSURANCE PROGRAMS 
--------------------------------- 
 
27.  Currently, OPIC does not operate in Maldives. 
Maldives is also not a member of the Multilateral 
Investment Guarantee Agency of the World Bank Group. 
 
LABOR 
----- 
 
28.  Skilled and unskilled labor can be scarce, and 
expatriate labor is allowed in order to meet 
shortages.  There are an estimated 33,800 expatriate 
workers, mostly in tourism, construction and social 
and personal services.  Using expatriate labor is 
equally or more expensive than local labor.  Salaries 
are lower but travel and benefit costs make overall 
costs higher. 
 
29.  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' 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. 
 
30.  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 US 
Government 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, and has promised to pass them into 
law.  The US Government has offered technical 
assistance to review the draft legislation. 
 
31.  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, 
Price Waterhouse Coopers and KPMG. 
 
LUNSTEAD