| Abstract: | A. GEOGRAPHICAL FEATURES
The Maldives is a low-lying archipelago consisting of approximately 1,190 islands,
located in the Indian Ocean southwest of Sri Lanka. It has exclusive economic rights over
some 859,000 km of sea surrounding the islands but its land mass is limited to only 300
km and is widely scattered over an 850 km north-south fairly narrow stretch. Its
population of around 300,000 people inhabits about 200 islands, dispersed in 26
geographical atolls1, and organized in 20 regional administrative units. One third of the
inhabited islands have a population of less than 500, the rest have a population of less
than 1,000. This exceptionally wide dispersion of its people makes the Maldives unique,
even among other countries that are archipelagos.
Of the remaining islands, 87 are tourist resorts and 57 are leased for commercial
agriculture or used for industrial activity and garbage storage. Accordingly, the vast
majority of the islands are uninhabited although a few of these are used for subsistence
agriculture.
The surrounding sea contains enormous fishery resources. The islands are also an
attractive tourist destination given their sandy white beaches and clear lagoons, bringing
more than 600,000 tourist arrivals in 2004. The main natural endowments are thus
associated with the marine environment. However, the meagre landmass is a causal factor
limiting economic opportunities and market development and the country’s geographical
features incur high transport costs, thus putting pressure on the competitiveness of the
economy.
B. GOVERNMENT
The Maldives is an independent sovereign nation governed under a democratic executivestyle
system. The capital Male’ is situated roughly almost at the middle of the north-south
string of islands that make up the country. The president, also head of state and
government, and lawmakers are elected according to universally accepted democratic
principles for a term of five years. Each atoll is represented in the country’s legislature.
Over the years, the country has been politically stable, and in May 2005, the first steps
for introducing a multiparty system were taken.
1 Atoll is derived from the Maldivian word atholhu, the only Maldivian word that has become international.
It identifies an atoll as a number of islands sharing a common outer reef; there can be one to several
hundreds of islands forming an atoll.
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C. ECONOMIC TRENDS
Buoyant GDP growth of up to 6 – 9 per cent year driven by investment in the tourism
sector with negative or very low levels of inflation is a distinctive feature of the economy
in recent years. Significant progress has also been achieved in human and social
development over the past two decades. Prudent macroeconomic and public investment
policies as well as a largely favourable external environment has facilitated this progress,
lifting the Maldives from being one of the 20 poorest countries in the 1970s to one that
shares many characteristics of a lower middle-income country today. The GDP per
capita was Rf 30,733 (US$ 2,401 equivalent) in 2004. As a result, the Maldives’
graduation from LDC status is a real possibility. However, the government would prefer
to delay graduation so as not to lose foreign assistance – including participation in the
Integrated Framework – that is critical to the country’s recovery from the divesting
tsunami that hit the Maldives and other countries in the region on 26th December 2004.
Although loss of human life was minimal, it is estimated that the loss to the economy
caused by the tsunami is around 62 per cent of GDP, with full recovery not expected
before 2008. It is understood that the United Nations Economic and Social Council
(ECOSOC) is sensitive to the government’s need for a carefully managed graduation
programme with appropriate transition arrangements.
Though liberalization of the economy is advanced and economic growth rates are
nominally high, a significant proportion of the jobs created have gone to foreign workers
due to rigidities in the local labour market. For a variety of reasons that is elaborated
upon in the DTIS, relatively high levels of unemployment and underemployment are a
distinctive characteristic of the economy. Flexibility in macro-economic policy is
somewhat limited as the country’s currency, the Rufiyaa, is pegged to the US dollar.
Recent developments have had a negative impact on trade and economic performance. In
particular, there has been a dramatic change in 2005 following the tsunami. This resulted
in a downturn in the tourism sector which contributes substantially both to GDP and to
foreign exchange earnings. In addition, the garment and apparel industry literally
collapsed during 2004 as the end of the Multi-Fibre Agreement (MFA) quota system
approached. Rising oil prices throughout 2005 and during the first half of 2006 has
brought about a downward spiral in the terms of trade. The boom years that Maldives
has experienced in recent years up to 2004 may now be at an end. There is therefore an
urgent need to address this situation so that measures can be taken to mitigate the
problems that are now being experienced. To this extent, the DTIS exercise for the
Maldives has been more than timely.
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D. POVERTY AND HUMAN DEVELOPMENT
The recent economic shocks that the country has experienced have exposed the
constraints of an economy that is dependent essentially on the tourism sector and the
limited intra- and inter-sectoral linkages. Moreover, lack of employment opportunities
and insufficient provision of secondary and tertiary education facilities on the atolls, has
caused migration to Male’. Migratory trends were further aggravated by the tsunami. As
a result the Male’ population is now estimated at 70,000, whereas its theoretical capacity
is 50,000. Congestion and unemployment are the immediate negative impacts.
With regard to indicators of human welfare, in particular the human development index
(HDI), in 2005 the Maldives was ranked 96 (HDI=0.745), behind Dominican Republic
(0.749), Turkey (0.750) and Sri Lanka (0.751), ahead of Turkmenistan (0.738) and
Jamaica (0.738). This is actually a small slide from a ranking of 84 in 2004 when the
Maldives was ahead of Turkey (94) and Sri Lanka (96). The GDP per capita of $ 2,401 in
2004 is near that of Vietnam but below Sri Lanka and Seychelles. The Vulnerability and
Poverty Assessment (VPA) carried out by UNDP in 1997 and 2004 indicated that
absolute poverty is below one percent.
E. TRADE PERFORMANCE AND POLICIES
The Maldives economy is very open. Trade in goods typically accounts for around 75-80
per cent of GDP. If services are taken into account, trade in goods and services account
for approximately 150 per cent of GDP.
Imports of goods typically outweigh exports of goods (mostly fish and fish products) by a
factor of between three and four. However, this large shortfall in foreign exchange
earnings is to a large extent made up for by revenues from the export of services via the
tourism sector. There is therefore only a relatively modest negative current accounts
balance.
Although there is currently very limited production activity in the Maldives, there is need
to be aware of anti-export bias in the tariff structure that may impact on other sectors,
such as tourism. Apparently, this problem is being addressed through the extensive use of
discretionary duty concessions and exemptions. The total value of these in 2004 was Rf.
413 million, compared to actual collections of Rf 1,136 m, representing approximately 36
per cent of total revenue. In previous years the proportion of concessions and exemptions
has been similar (37 per cent in 2001). In 2004 main beneficiary sectors were tourism and
fisheries.
Theoretically, graduation from least-developed country status will affect the privileges
and preferences that Maldives currently enjoys under the multilateral trading system as an
LDC member of the WTO. As the graduation of an LDC is unprecedented since the
establishment of the WTO in 1995, the graduation of the Maldives will establish some
important precedents for the trade body in regard to transitional arrangements. Indeed,
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WTO members (through the Committee for Trade and Development, CTD) have
responded cautiously and agreed to grant the Maldives a transitional period based on a
roadmap for graduation to be prepared by the Maldives government.
However, in tangible terms, there are two major consequences of Maldives graduating
from LDC status: loss of preferential market access; and possible reduction in trade
related technical cooperation.
F. BUSINESS ENVIRONMENT AND PRIVATE SECTOR DEVELOPMENT
The business environment in the Maldives is liberal – the result of which is particularly
visible in the tourism sector. As a result, the Maldives comes out fairly well in the World
Bank ‘Doing Business Survey’ of such issues as ease of entry and establishment or free
repatriation of profits (see the Appendix to this chapter). Indeed, given the specificity of
tourism sector ‘resource-seeking’ investment, or perhaps more aptly in the Maldives case,
‘resort-seeking’ investment, a benign approach is primarily what is required to attract the
necessary flows. But the business environment in the Maldives is also one in which there
are significant gaps in the underlying policy, institutional and legal framework for
business development and private sector support. This is reflected in the general
weakness of the domestic private sector and thin national portfolio of SMEs engaged in
value added activities in the dominant tourism and fishery sectors, forging stronger intraand
inter-sectoral linkages, and achieving a more diversified economy.
It is also true that as a small island developing economy, the business environment in the
Maldives poses formidable challenges for the investor and entrepreneur. Aside from
Male’, the capital, there is no significant population centre. Local markets are also
difficult to reach given the exceptionally wide dispersion of people. There are therefore
serious limitations on the extent to which economies of scale can be exploited. High costs
of transportation, infrastructure, energy and water, complete dependence on imported
technology, and unavailability of a wide range of skills are further constraints on
attaining a competitive business environment. These difficulties were dramatized in the
collapse of garment manufacturing when the Multi Fibre Agreement (MFA) expired at
the end of 2004.
The challenge for the Maldives is to put in place the necessary framework to enable it to
take full advantage of its comparative advantage in the tourism and fishery sectors and
strong potential in other sectors such as horticulture, port services, handicraft,
aquaculture, etc. There is considerable scope for value-added business opportunities in
the two main sectors and for dynamic linkages between these and other sectors. As the
Appendix illustrates, on some key aspects of the business environment, the record of the
Maldives is mixed.
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G. CUSTOMS SERVICES AND TRANSPORT INFRASTRUCTURE
The discussion in the DTIS of the services that facilitate trade in the Maldives is based on
recognition that tourism and fishery are the most important export sectors. Currently,
over 600,000 tourists a year visit the country, with projections for continuing growth.
This requires adequate airport, port and transport transfer facilities to service this volume
of visitors in addition to efficient importation processes for the inputs – ranging from
construction materials for building and maintenance work on the resorts to food,
beverages, and other consumer goods - required by the tourism sector. The fishery sector
also depends on the importation of critical inputs such as fuel, boat engines and other
fishing gear. Fishery exports are mostly perishable goods and therefore depend on
efficient export processes. Significant constraints in hub capacity for both air and
maritime transport need to be addressed.
Transaction costs are lower when customs procedures are carried out efficiently. The
DTIS research confirmed that there is a perception among private sector users that
customs procedures are not applied in a uniform and customary way across the country.
Malpractice is alleged arising from face-to-face contact between clients and customs
officers. But the overall assessment of the DTIS team is that customs procedures are
satisfactory although there is room for improvement.
In particular, although the customs service is computerized and officers have received
training in operating such tools and facilities, there are still gaps at the technical level
hindering an optimal use of the technology and IT software systems available. For
example, the ASYCUDA++ is not fully utilized and all potential application towards
more efficient use has not been explored. In addition, current operational systems and
procedures in the cargo control area impede the movement of goods and do not meet the
set objective of obtaining maximum revenue at minimum cost. There is also a lack of
effective communication and coordination among customs services, the trading
community and other agencies (port authority, aviation services, clearing agents, coast
guard or police), which adversely affects the efficiency of processes relating to the
movement of goods.
H. TOURISM SECTOR
Very few countries in the world can offer tourists an exotic atoll environment, and even
fewer countries in the world are made up of coral platforms, with the accompanying
image of Robinson Cruise islands and islets with white sandy beaches, unpolluted crystal
clear water and abundant marine life.
Overall, the assessment of the DTIS is that institutional capacity for the development,
management and implementation of tourism policy in the Maldives is adequate, although
there are significant gaps and policy shortcomings. There is also an almost total absence
of civil society involvement or engagement with tourism policy.
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The recommendations cover these issues including the need for support to SME
development to facilitate linkages within and between tourism and other economic
sectors. With foreign workers accounting for over half the total number of jobs in the
tourism sector, the recommendations also deal with labour market issues, education and
training.
I. FISHERY SECTOR
The geographical characteristics of the Maldives as an archipelago with a 960,000-km²
exclusive economic zone (EEZ) make marine resources an important natural asset. The
vast EEZ contains a variety of pelagic species (i.e. fish living in the open ocean) such as
tuna species and mackerel, near shore reef fish species and demersal or bottom living
species. There are two main commercially active sub-sectors: marine catch fishery and
fish processing. There is at present no aquaculture on any commercial scale.
Unlike tourism where the government is active in promoting FDI and in marketing the
Maldives as a destination, the fishery sector has seen virtually no FDI and attracts
relatively little government support.
The assessment of the DTIS is that the overall capacity to carry out fishery policy
analysis and implement development plans is considered insufficient. There is scope for
upgrading the level of technical training and bringing modern methods of fishery policy
management into work of the key government agencies concerned.
The non-alignment of policy with commercial opportunities is further reflected in the
almost total absence of aquaculture – the cultivation of certain fish species – in the
Maldives although the reef provides a natural habitat.
Another gap concerns the inadequate policy measures to promote the sector as an
employment and business opportunity. Although fishing as such is potentially lucrative
and generates average returns that are higher than income from public sector
employment, as an occupation it is held in low esteem in Maldives society. The younger
population shuns fishing, a trend confirmed by survey findings which shows that the
average crew age is increasing. The provision of appropriate training facilities as the
basis of modernization and professionalization of the occupation can help overcome this
trend with significant gains for the development of the sector. Credit and business
support facilities for the occupation are also required.
Inadequate policy measures to promote the sector as an employment and business
opportunity is also reflected in the weak linkages to the tourism industry. Although resort
and catering industry chefs demand fresh reef fish, crustacean products and the more
expensive tuna species such as yellowfin and bigeye for their clientele, supply has been
uncertain and inconsistent, leading in some case to fish imports! |
