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