Posted by admin | Posted in Doing Business in the Maldives, Maldives News, The Maldives | Posted on 20-10-2009
Maldives Business Climate
Maldives Fast Facts
- The Maldives comprises 1,190 islands, 198 of which are inhabited and 95 are exclusive resort islands.
- Maldives population is approximately 300,000, 103,000 of whom live on the capital island of Male.
- As well as the standard population, the Maldives is home to an extra 80,000 expatriate workers.
- Tourist arrivals are more than 680,000 annually.
- 2008 GDP was around $1.2 billion, ($3,900 per capita), which far exceedes the average of about $700 in the rest of South Asia.
- GDP growth over the last ten years averaged around 6% per year except for 2005, when GDP declined following the Tsunami. In 2008, GDP growth was 5.7%.
- Economic growth has occurred thanks mainly to tourism, transportation, communications and construction. Fishing is also an important economic sector.
- Income disparity remains high in the Maldives, particularly between Male and the more distant islands.
- The number of people enrolled in education has increased in recent years; the primary education rate is close to 100%. Literacy rates are about 98%. Infant and maternal mortality rates are declining rapidly.
The Tsunami’s Effects on Business
The 2004 tsunami in December 2004 devastated a lot of the Maldives; damage was estimated at $450 million. Thanks to tourism, the Maldivian economy was able to make a remarkably fast recovery. The development of new resorts was a large boost to the economy. Despite significant recent growth, the development of the Maldives has come at the cost of extremely high budget deficits and mounting foreign debt. Since 2004, government spending has increased rapidly to a remarkable 70% of GDP in 2008 and the budget deficit has expanded to 10% of GDP. International organisations like the IMF have urged the government to return to fiscal prudence quickly to ensure economic stability.
2008: The Maldives becomes a Democracy
The Maldives underwent significant change in 2008. With the election of President Mohammed Nasheed, the country launched a new constitution and several new laws, including a new employment act. Other campaign promises of the new President included creating a transport network between the islands, improved financial and political stability, reduced cost of living, eliminate illegal drugs and provide more affordable housing and healthcare.
2009 Economic Forecasts for the Maldives
The Maldives Central Bank forecasts 2009 GDP growth to be around 4.5%, although with the global recession, it is probable that the growth rate will indeed be less. The country’s trade deficit has increased in the last few years, owing to increased oil and construction material prices. In 2008, the trade deficit reached an estimated $900 million. However, this deficit was partially offset by tourism and government borrowing. The current account deficit was $637 million. The balance of payments recorded a deficit of about $72 million in 2008. The Maldives’ total external reserves stood at $241 million in December 2008 (2.1 months of imports). External debt and debt service have risen rapidly in recent years. Total external public debt was $477 million in 2008 and is likely to surpass $750 million in 2009. A foreign exchange shortage affecting businesses was reported as of March 2009.
Doing Business in the Maldives
In the “Ease of Doing Business Index” created annually by the World Bank, the Maldives is ranked 69 out of 181 countries. The “Ease of Doing Business Index” investigates laws and rulings that enhance or constrain business activity. Within the index, Maldives ranked first in terms of paying taxes (Maldives has no income or sales tax), fourth in employing workers, and eighth in dealing with construction licenses. But in terms of registering property, getting credit, and closing a business, the country ranked lower, at 177, 145, and 123, respectively. Other rankings were as follows: starting a business 38, protecting investors 70, trading across borders 121, and enforcing contracts 90.
List of Least Developed Countries
The Maldives is scheduled to be removed from the list of the Least Developed Countries in the world in the year 2011, but the country is aiming to delay this event, since it will make it harder for the country to access foreign aid, concessionary trade and finance programs, and would also threaten the fishing export industry.
Tourism Main Industry in the Maldives
Tourism is expected to continue as the most important sector in the Maldives’ economy. Despite imposing sea levels, new resorts are expected to be constructed in the Maldives, with 2 planned openings in the year 2009. A five-year plan announced in 2007 outlines the “National Development Plan”, during which time the country aims to improve tourism and infrastructure, modernize education and improve social security.
Foreign Investment in the Maldives
Foreign investment in Maldives is governed by Law 25/79, which governs agreements between the government and investors. 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, contract terms are negotiable.
The Maldives opened up to foreign investment in the late 1980s. Foreign investments in the Maldives have primarily involved resort management, but also include telecommunications, finance, banking, insurance, air transport, courier services, and some manufacturing. 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 discussion. International arbitration is available for dispute settlement. Foreign investments within the tourism sector – such as resorts – are registered with the Ministry of Tourism, Arts and Culture.
The Ministry of Economic Development 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, valuation, flying schools and IT services. Proposals for joint ventures in other sectors and investments fully owned by foreigners are approved within 30 days.
The Maldives government hopes to privatize airports and harbors and develop basic services such as water, sewerage systems, harbors, roads and power utilities through public private partnerships.
The Ministry of Economic Development is looking for local and foreign investors in media and broadcasting, entertainment industry, utilities, infrastructure, health care facilities, hospital management, regional airport management, and the development of residential infrastructure (vacation homes).
The Ministry of Economic Development 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.
Maldives Foreign Investment Opportunities:
Opportunities exist in the entire range of services, including development and management of resorts, tourist activities, and land and sea transportation.
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.
The government is planning two major development plans in the area of population consolidation. 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
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.
Ownership Regulations in the Maldives
There is little private ownership of land in the Maldives. Land reform currently under consideration may result in more trade and private ownership of property. Instead of being granted ownership rights, foreign investors are granted lease rights ranging up to 25 years, which can be later extended depending on the level of investment. It is possible that the lease term be extended from 25 to 99 years.
Maldives Capital Markets
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. Banking supervision has recently been upgraded, moving toward international best practices.
Securities Trading in the Maldives
A small Securities Trading Floor (STF) opened in Male’ in 2002 and was licensed as a private stock exchange in 2008. 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.
Corruption in the Maldives
Corruption is a serious problem in Maldives, and the new government has vowed to fight it. 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, -0.51 in 2006 and -0.78 2007. Transparency International’s Corruption Perception Index surveyed Maldives for the first time in its 2007 index and Maldives ranked 84 with a score of 3.3 out of a possible 10. In 2008, Maldives slipped 31 places and ranked 115 out of 180 countries with a score of 2.8.
The law on prevention and punishment of corruption (2002) 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. An Anti-Corruption Commission was created in December 2008 following the passage of the Anti Corruption Commission Act. The responsibilities of the Commission include inquiring into and investigating all allegations of corruption; to recommend further inquiries and investigations by other investigatory bodies; and to recommend prosecution of alleged offences to the Prosecutor General, where warranted. The Anti-Corruption Commission is empowered to handle cases of corruption of members of parliament. It cannot investigate corruption in the private sector.
In March 2007, the Maldives acceded to the United Nations Convention against Corruption.
Maldives Employment Laws
Skilled and unskilled labor is scarce, and expatriate labor is allowed in order to meet shortages. There are an estimated 80,000 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. Since higher education options in Maldives are limited, young Maldivians from higher income families often travel abroad for education.
The laws covering labor were overhauled in 2008 with the enactment of the 2008 Maldives Constitution, the new Employment Act, and a subsequent amendment to the Employment Act. The new constitution recognizes the workers’ right to strike and establish trade unions, for the first time. Maldives is hoping to enact a separate trade union law providing rules for formation of trade unions and collective bargaining.
The Employment Act provides for the establishment of minimum wages, maximum hours of work, overtime, annual and sick leave, maternity leave and work place safety.
The Employment Act created a 48-hour/week with a compulsory 24-hour break after six days of continuous work. Resort workers may accumulate the weekly rest day. Overtime is available. Workers in tourist resorts may work additional two hours a day and paid at overtime rate. Employees are usually authorized 30 days of annual leave, 30 days of medical leave, 65 days of maternity leave, and 10 days of special annual leave to “attend important obligations.” Either parent of a newborn child is entitled to one year’s unpaid annual leave after the expiry of the maternity leave period. Employers are also required to provide a safe workplace. The law provides for entering into of agreements between the employer and the employee which guarantees the rights specified in the law.
Until recently, the government did not recognize the right to form unions or the right to strike. Hence, labor actions and disputes were rare. While no labor unions yet exist, collective bargaining involving employees’ associations in the tourism sector began within days of the new constitution taking effect. Labor disputes arose in some resorts when employees’ associations presented demands for wage increases and improvements in the conditions of work and stopped work.
Traditionally, wages in the private sector have been set by a contract between employers and employees and were based on rates for similar work in the public sector. The new employment law established a Pay Advisory Board to advise the Minister of Human Resources, Youth and Employment on setting minimum wages in the private sector.
The Employment Act granted workers the right to compensation if fired without cause. The government has established a Labor Relations Authority to implement the new employment law. The law requires the Ministry of Human Resources to issue specific rules for employment of foreign workers.
The Employment Act does not cover emergency workers, air and sea crews, executive staff of any company and persons on on-call duty.
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, Sheraton, SeaTec, Ernst and Young, PricewaterhouseCoopers, and KPMG.