Eco­nomic Dreams

In­stead of solely re­ly­ing on the tourism in­dus­try, the Mal­dives needs to di­ver­sify its eco­nomic port­fo­lio.

Southasia - - CONTENTS - By Huza­ima Bukhari & Dr. Ikra­mul Haq

The gov­ern­ment of the Mal­dives is plan­ning to give un­prece­dented in­cen­tives to for­eign in­vestors.

The Gov­ern­ment of the Mal­dives has re­cently passed the Spe­cial Eco­nomic Zone Act 2014 to give pro­tec­tion to for­eign in­vestors. The bill of­fers ex­tra­or­di­nary ben­e­fits and in­cen­tives to at­tract for­eign in­vest­ment that can be cru­cial for the coun­try’s eco­nomic growth. Though the law has been crit­i­cized by the Op­po­si­tion and termed as con­tro­ver­sial by many an­a­lysts, the real is­sue is whether it is eco­nom­i­cally ra­tio­nal or not. By adopt­ing the law, the Mal­dives has fol­lowed a pol­icy of adopt­ing good prac­tices. It also proves that the coun­try is will­ing to learn from suc­cess mod­els around the world which val­i­date that for­eign di­rect in­vest­ment (FDI) can­not be en­sured un­less a proper le­gal frame­work is pro­vided.

Pres­i­dent of the Mal­dives Ab­dulla Yameen rat­i­fied the Spe­cial Eco­nomic Zone Bill on Septem­ber 1, 2014. The bill was passed by the par­lia­ment at its 29th sit­ting, on Au­gust 27, along with six amend­ments. It was ap­proved with a majority as 60 mem­bers voted in its fa­vor and 15 mem­bers against. The Mal­di­vian Demo­cratic Party sug­gested 245 amend­ments to the gov­ern­ment's flag­ship spe­cial eco­nomic zone leg­is­la­tion but was un­able to muster enough votes to in­clude them in the pro­posed law. Another op­po­si­tion party, the Jumhoory Party, headed by business ty­coon Gasim Ibrahim, ini­tially op­posed the leg­is­la­tion but changed its stance at the last minute, back­ing the gov­ern­ment.

The MDP’s main ar­gu­ment against this law was that it would pave the way for money laun­der­ing and other crim­i­nal en­ter­prises and un­der­mine the de­cen­tral­iza­tion of the sys­tem by au­tho­riz­ing a board formed by the pres­i­dent to openly sell off the coun­try with­out par­lia­men­tary over­sight. It also ob­jected to ex­empt­ing in­vestors from pay­ing im­port du­ties or taxes for 10 years as well as al­low­ing com­pa­nies with for­eign share­hold­ers to pur­chase land with­out pay­ing sales tax. The gov­ern­ment coun­tered the ob­jec­tions by con­tend­ing that re­laxed reg­u­la­tions and tax in­cen­tives were nec­es­sary to make for­eign in­vestors se­lect the Mal­dives over other de­vel­op­ing na­tions and to launch mega projects there.

On his re­turn from an of­fi­cial tour to China in Au­gust, Pres­i­dent Yameen in­formed the legislators that he had

man­aged to ob­tain con­ces­sional fund­ing for a key bridge project and had dis­cus­sions about ex­pand­ing in­vest­ment and trade links with China. His spe­cial fo­cus was the ex­pan­sion of the in­ter­na­tional air­port in Male, build­ing an iconic youth city, a har­bor that could tie up with China's 21st cen­tury mar­itime Silk Road pol­icy and 50 new ho­tel re­sorts in the next five years for which the SEZ law was piv­otal.

He said, “We are no longer try­ing to bring in $100,000 or $200,000 in­vest­ments. To­day, we are try­ing to bring in con­sor­tiums will­ing to bring in hun­dreds of in­vest­ments,” adding that “liv­ing in over 190 is­lands, we are not able to pro­vide the same qual­ity of ser­vices in all is­lands. This is the big­gest chal­lenge to the de­vel­op­ment of the coun­try.”

The pass­ing of the SEZ law is, there­fore, aimed at win­ning the con­fi­dence of in­vestors and tourists as well as re­vival of the econ­omy which is not in good shape. The coun­try needs to over­come all kinds of dif­fi­cul­ties, es­pe­cially those re­lated to tourism. At the mo­ment, the gov­ern­ment spends sub­stan­tial sums in at­tract­ing for­eign vis­i­tors with big purses. In the past, build­ing a tourist re­sort re­quired $2-$3 mil­lion, but now it takes no less than $80 mil­lion or even more.

The in­crease in the prices of ma­te­ri­als and ser­vices has ne­ces­si­tated the pass­ing of a law that for­goes taxes to at­tract huge in­vest­ments. Pres­i­dent Yameen ex­plained it in th­ese words: “I am talk­ing about a guest­house is­land de­vel­oped through the tourism in­dus­try. The ben­e­fits will not be spe­cific to those who run the guest houses, but to the is­land as a whole. Cit­i­zens know­ing how to work is the big­gest for­tune a coun­try could pos­sess.”

The main ap­pre­hen­sion of the busi­ness­men will­ing to invest huge sums in the Mal­dives was the ques­tion of the pe­riod of lease. They were not will­ing to invest their money if the lease pe­riod was 33 years. The gov­ern­ment was of the view that “we do not even get the op­por­tu­nity to sit down and hold dis­cus­sions with such ma­jor in­vestors.” Pres­i­dent Yameen be­lieves that his gov­ern­ment has now cre­ated the le­gal en­vi­ron­ment needed to at­tract ma­jor in­vest­ments.

After the pas­sage of the law, the MDP de­scribed it as an at­tempt to “sell the coun­try.” It al­leged that the bill “has opened doors for the gov­ern­ment to gain prof­its through cor­rup­tion.” Gov­ern­ment sources coun­tered th­ese al­le­ga­tions by say­ing that the bill would bring in ma­jor in­vest­ments and would open doors for eco­nomic pros­per­ity “the likes of which the coun­try has never seen be­fore.”

Ab­d­hulla Haleel, chair­man of the Eco­nomic Com­mit­tee, said that the SEZ law over which the op­po­si­tion had raised a lot of con­cerns had been amended as sug­gested by mem­bers and gov­ern­ment in­sti­tu­tions, though with­out any changes made to its main con­cept.

The crit­ics of SEZ leg­is­la­tion have not taken into ac­count the fact that the Mal­dives is fac­ing tough chal­lenges on the front of ac­cel­er­at­ing eco­nomic growth, which is pro­jected at around 4 per­cent in 2014. The coun­try also faces sig­nif­i­cant fis­cal and bal­ance of pay­ment prob­lems. The re­cent pro­jec­tions of its cen­tral bank es­ti­mate that the coun­try’s cur­rent ac­count deficit will widen to about $270 mil­lion in 2014 or 11 per­cent of GDP.

The In­ter­na­tional Mon­e­tary Fund is sur­prised by the Mal­dives’ eco­nomic re­silience de­spite its long­stand­ing eco­nomic prob­lems. In De­cem­ber 2009, the IMF ap­proved a $93 mil­lion loan for the coun­try. After the first two dis­burse­ments, the IMF with­held sub­se­quent dis­burse­ments due to con­cerns about the bud­get deficit and de­manded that it must be fur­ther re­duced. The Mal­dives’ econ­omy de­pends largely on tourism. Pres­i­dent Ab­dulla Yameen rightly ar­gues that the SEZ law would "trans­form the econ­omy through di­ver­si­fi­ca­tion and mit­i­gate the re­liance on the tourism in­dus­try.” The writ­ers, part­ners in law firm Huza­ima & Ikram (Taxand Pak­istan), are ad­junct fac­ulty at the La­hore Univer­sity of Man­age­ment Sciences.

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