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Cablegate: Imi - Investment Climate Statement 2005 - Maldives

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

091044Z Mar 05

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
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

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