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Cablegate: Investment Climate Statement for Maldives,

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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