40282 Public Disclosure Authorized THE MALDIVES Sustaining Growth & Improving the Investment Climate Public Disclosure Authorized April, 2006 Public Disclosure Authorized Public Disclosure Authorized Finance and Private Sector Development Unit South Asia Region The World Bank MALDIVES SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE © 2006 The International Bank for Reconstruction and Development/ THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, USA The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA Telephone 978-750-8400, Fax 978-750-4470, www.copyright.com All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, Fax 202-522-2422, e-mail [email protected] ISBN : 955-8908-22-3 Cover photograph by; Simon Bell Designed & Printed by; Ari Investments Limited 19, St. Joseph Road, Nugegoda, Sri Lanka. II MALDIVES SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE TABLE OF CONTENTS Acronyms and Abbreviations . IV Acknowledgements . VI Executive Summary . .VII Chapter 1 Macro-economic Overview . 1 Chapter 2 Profiles of Tourism, Manufacturing and Transport - Logistics Sectors . 10 Chapter 3 Investment Climate and its impact on Enterprise Performance . 16 Chapter 4 International Competitiveness of the Maldivian Economy . 33 Chapter 5 Tourism Sector and Its Potential . 43 Chapter 6 Fisheries Sector and Its Potential . 60 Chapter 7 Conclusions and Policy Recommendations . 77 Annex 1 Governance Initiatives . 89 Annex 2 Potential for Agricultural Products in the Maldives . 91 Annex 3 Case Study on the Construction Industry . 95 Annex 4 Case Study on the Handicraft Industry . 99 Annex 5 Tourism- Leasing of Resort Islands . .102 Annex 6 Tourism - SWOT Analysis . .106 Annex 7 Tourism - Statistical Annex . .107 Technical Appendix 1 Sampling Methodology . .115 Technical Appendix 2 Investment Climate & Firm Performance . .119 References . .123 III MALDIVES SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE ACRONYMS AND ABBREVIATIONS ADB Asian Development Bank AG Attorney General ATMs Automated Teller Machines BML Bank of Maldives CICFA Foreign Investment I-WB CPI Consumer Price Index DBI Doing Business Indicators EEZ Exclusive Economic Zones ESOPS Employee Stock Options FAD Fish Aggregating Devices FAO Food and Agriculture Organization FDI Foreign Direct Investment FET Faculty of Engineering Technology GDP Gross Domestic Product GEF Global Environment Fund HDFC Housing Development Finance Corporation HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome HRD Human Resource Development ICA Investment Climate Assessment IDA International Development Association IFC International Finance Corporation ISBS Integrated Standard Banking System ISIC International Standard Industrial Classification ITQ Individual Transferable Quotas ITR International Tourism Receipts LDC Less Developed Country MACI Maldives Association of Construction Industry MATI Maldives Association MCHE Maldives College of Higher Education MCS Marine Control and Supervision MDGs Millennium Development Goals MFA Multi Fibre Agreement MFLC Maldives Finance Leasing Company MIFCO Maldives Industrial Fisheries Company MIGA Multilateral Investment Guarantee Agency MMA Maldives Monetary Authority MoFAMR Ministry of Fishing, Agriculture, and Marine Resources MRC Marine Research Council MRfs Maldives Rufiyaas MTCA Ministry of Tourism and Civil Aviation NDB National Development Bank IV MALDIVES SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE NGOs Non-Governmental Organizations OECD Organization for Economic Cooperation and Development PE Public Enterprises SARS Severe Acute Respiratory Syndrome SASAR South Asia Agriculture and Rural Development SASFP South Asia Finance and Private Sector Development SIDS Small Island Developing States SIE Small Island Economy SME Small and Medium Enterprise SOEs State Owned Enterprises STELCO State Electricity Company STO State Trading Organization SWIFT Society for Worldwide Inter-bank Financial Telecommunications SWOT Strength, Weaknesses, Opportunities, Threats UNDP United Nations Development Program UNEP United Nations Environment Program VA Value Added VAT Value Added Tax VPA Vulnerability and Poverty Assessment WTO World Trade Organization WTTC World Travel and Tourism Competitive V MALDIVES SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE ACKNOWLEDGEMENTS This report was prepared jointly by the South Asia Finance and Private Sector Development Unit (SASFP), the Agriculture and Rural Development Unit (SASAR), and the Investment Climate Unit of the World Bank. The team was co-led by Sriyani Hulugalle (senior economist) and Sunil Chandrasiri (external consultant), and the team consisted of Iain Christie (consultant), Grant Milne (senior natural resource management specialist), Nalin Perera (junior professional associate), and Kristoffer Hvidsteen (junior professional officer). The authors appreciate the initial contributions of John Nasir and Neil Macpherson and comments from Christian Eigen-Zucchi. The advice and guidance provided by Simon Bell (sector manager, SASFP), Alistair McKechnie (country director, Maldives), Gajan Pathmanathan (sector manager, SASAR), and Richard Scurfield (special resident representative in the Maldives) is much appreciated by the team. The authors gratefully acknowledge the support and guidance received from the Maldives Ministry of Finance and Treasury, led by Hon. Riluwan Shareef and his able team of officers. The team also notes the guidance and direction provided by the Maldives Government Technical Counterpart team, comprising Hon. Abdulla Jihad, Mr. Yusuf Riza, Dr. Fathimath Hameed, Mr. Ibrahim Naeem, Ms. Aishath Shahuda, and Ms. Ilham Mohamed. In addition, the support provided by the Maldives Association of Tourism Industry, the Maldives National Chamber of Commerce and Industry and the Maldives Association of Construction Industry to ensure a good response from their membership for the survey is greatly appreciated. This report would not have been feasible without the contributions and support of officials from a large number of public and private sector institutions, including the Ministry of Finance and Treasury, the Maldives Monetary Authority, the Ministry of Tourism, the Ministry of Planning, the Tourism Promotion Board, the Bank of Maldives, the State Trading Organization, Maldives Customs, the Department of Inland Revenue, the Maldives College of Higher Education, the Ministry of Housing and Development, the Ministry of Justice, the Auditor General's Office, the Ministry of Atolls Development, the Maldives Airports Authority, financial institutions, and other public and private sector organizations. The team would like to thank staff and consultants of the United Nations Development Program, the Food and Agriculture Organization, and the Asian Development Bank who shared their views and reports. The team gratefully records its appreciation of all the enterprises and individuals who participated in the survey despite their busy work schedule. The survey was carried out by A.C. Neilsen (Pvt) Limited led by Dwight Watson and Jinendra Kotalawala. The peer reviewers, Bernard Drum and Jean M. Marchat, are acknowledged gratefully. The team is thankful for the administrative support provided by Marjorie Espiritu, Kadija Jama, and Malathi Ratnayaka. VI MALDIVES SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE EXECUTIVE SUMMARY The Maldives has recorded remarkable economic growth over the past two decades, especially compared with the rest of the South Asian countries, and is on the threshold of graduating from Less Developed Country (LDC) status to the middle-income group. It reached an impressive per capita income of $2,514 in 2004 ---from $771 in 1984 ---and has sustained an annual GDP growth of 7.9 percent in the past 15 years. A country that was not even on the economic radar in the 1980s has become a phenomenal success due to a continued stable political environment and strong leadership and commitment to liberalization policies, all of which have attracted a significant level of foreign direct investments (FDI). The homogeneity of race and religion have also partly contributed to the country's long-term social stability. However, due to the combination of the adverse impact of the Tsunami and the expansionary expenditure policies of the government, for the first time in its history, the country has recorded a negative growth rate --- 5.5 percent in 2005. Ironically, although the Maldives lacks the resource endowments, the scale of economies, and the geographical diversity enjoyed by its South Asian neighbors, it has surpassed all of them to achieve the highest per capita GDP levels in the region. What is more remarkable in this island state is the achievement of economic upsurge without compromising human development. The economic achievements were complemented by high literacy, low maternal and child mortality, declining