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Cablegate: Investment Climate Statement, 2008 - Maldives

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

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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.


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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.


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--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

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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


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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

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