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Maldives: Investment Climate Assessment

MALDIVES: SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE
MALDIVES: SUSTAINING GROWTH & IMPROVING THE INVESTMENT CLIMATE

Report Summary:
 
(July 12, 2007) The Maldives belongs to a special category of countries called "Small Island Economies," of which a large number are dependent primarily on tourism and or on a narrow product or service range. 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.
 



Facts:
- Maldives is on the threshold of graduating from Less Developed Country (LDC) status to the Middle Income Group.
- The Maldives belongs to a special category of countries called "Small Island Economies."
- Compared to the rest of South Asia, Maldives already has created a better investment climate.
- Maldives has been very successful in developing its tourism industry and which accounts for 33% of GDP.
- Maldives receives about 600,000 tourists a year, double its total population.
- The fisheries sector is also an important contributor of foreign exchange.


Executive Summary
The Maldives has recorded remarkable economic growth over the past two decades and is on the threshold of graduating from Less Developed Country (LDC) status to the middle-income group. 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.

The Investment Climate Assessment (ICA) Survey was carried out by the World Bank team which worked closely with both the government agencies and the industry associations. The ICA team also carried out selected interviews with a large number of public and private enterprises and drew extensively on a plethora of studies conducted in related areas by various international and local agencies. The ICA revealed that there are number of areas that represent major obstacles to all sectors, including: (i) access to finance; (ii) the cost of finance; (iii) access to land; (iv) skilled labor; and (v) corruption. The entrepreneurs have identified access to finance as one of the most important and most severe constraints affecting enterprise performance.
 
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Chapter 1: Macroeconomic Overview
The main objective of the investment climate study in the Maldives is to develop a better understanding of the constraints to support more rapid expansion and growth of investments in the formal enterprises in the Maldives, provide input to the Seventh National Development Plan, and identify priority areas for funding for the country's development partners, including the World Bank. Compared to the rest of the region, the Maldives has been able to provide a relatively better policy environment for investors. However, the results of the study will be useful for the government and the private sector in the Maldives and donor organizations for creating an even more conducive policy environment to further improve the investment climate over time.
 
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Chapter 2: Profiles of Tourism, Manufacturing and Transport - Logistics Sectors
The enterprise landscape of the island economy of Maldives is rather narrow and limited to a few economic sectors: tourism, fisheries, manufacturing, transport, and related services. It is estimated that there are about 2,500 registered small and medium enterprises (SMEs) in the Maldives and most of them are quite small, with an average turnover of less than $80,000 per annum. Most of them are located in Male, which accounts for about 27 percent of the total population. The sample frame details compiled by the ICA team comprised 1,003 business establishments operating in the manufacturing, tourism, and transport-logistics subsectors.
 
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Chapter 3: Investment Climate and Its Impact on Enterprise Performance
The assessment of the business climate and its impact on enterprise performance in Maldives is based on standard ICA methodology comprising both subjective and objective variables. The subjective measures provide a first step in understanding the preferences and perspectives of firms on constraints that affect the growth and expansion of business sector activities, while the objective measures provide additional information for carrying out the analysis, paying particular attention to industry-specific and country-specific factors. A proper blend of these two aspects allows us to assess the burden imposed by these constraints on enterprise performance.
 
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Chapter 4: International Competitiveness of the Maldivian Economy
The international competitiveness of the Maldivian economy is crucial, given its high degree of openness. In light of the integration of the economy with international markets and the increased cost of being a Small Island Economy (SIE), obstacles in the investment climate become pivotal to a country's international competitiveness. An investment climate conducive to entrepreneurship and well-functioning markets can offset some of the costs associated with being an SIE. Compared to the rest of South Asia, Maldives already has made headway in creating a better investment climate. However, experiences from other countries demonstrate more scope for improvement in the investment climate.
 
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Chapter 5: Tourism Sector and Its Potential
The Maldivians have shown a remarkable capacity to adapt since tourism began in the 1970s, perhaps reflecting their exposure to trade routes for millennia. Although the contribution of tourism to GDP is estimated at 33 percent, it is commonly believed that much of the activity in the islands-as much as 70 percent-is linked to tourism. Maldives receives about 600,000 tourists a year, double its total population.

It currently has almost no corporate tax revenues from tourism; taxation is based on long-term land leases negotiated on a per-bed basis for each individual resort island. The impact of the tourism industry is estimated as: (i) 44.4 percent of total taxes (land leases and bednight taxes); (ii) 33.0 percent of the GDP; (iii) 1 percent of total government expenditure; (iv) about 85 percent of total foreign exchange earnings (2004): $415.4 million (net of payments on service account); and (v) direct employment in resorts of 14,182, of whom half are foreign.
 
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Chapter 6: Fisheries Sector and Its Potential
This chapter provides a brief overview of the Maldivian fishing sector based on various World Bank studies and missions. In addition, the chapter also incorporates findings of the investment climate survey, which included a small number of firms in primary fishing, fish processing, and boat building. Tourism and fishing are key industries in the economy and account for approximately 40 percent of the GDP.
 
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Chapter 7: Conclusions and Policy Recommendations
The Maldives has achieved remarkable economic growth without compromising its social development. It has set a clear course of market-based integration with international markets, harnessing its natural endowment of marine-based assets in fisheries and tourism. Compared to the rest of South Asia, the Maldives already has made headway in creating a better investment climate. However, experiences from other countries demonstrate more scope for improvement. And, given the daunting challenges of being a small island economy and having limited resource endowments, the Maldives needs to continue improving the investment climate to sustain its current achievements in the economic, social, and political spheres.
 
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More Resources on Maldives
World Bank Program
A launching pad to all information on World Bank activities in the country (strategy, projects, publications, etc.)
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Maldives Tsunami Recovery
The World Bank Responds
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Development Data
A wide range of social and economic measures on Maldives, including links to the World Bank's most important online development databases.
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Analysis and Research
Compilation of all the World Bank's publications on Maldives, with "search" options and links to analysis and research on other South Asian countries.
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World Bank Program in South Asia
Launching pad to all information on World Bank activities in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
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Request an interview
To interview the report's author e-mail South Asia media contact.
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