Sustained growth is the stated objective for economic activity in the Maldives. For the economy of the Maldives to grow at around 5-6percent, it will strongly depend on several factors. While tourism and related industries are the mainstay of the economy, these need diversifications to protect them from global slowdowns. Other factors include the country’s small and highly undiversified economy, and the very high twin deficits it struggles with in its fiscal and current accounts.
While there is a need to improve the business environment to bring in foreign investments, reforms at best have had uneven outcomes and have led to tougher choices for investors. They are deterred by the country’s ambiguous foreign investment norms. The lack of supportive policies in a difficult political situation have impeded the growth of the private sector in the country.
And, worst of all, foreign companies run the risk of having their contracts terminated with little time in hand to make amends or adjustments to the changed circumstances. These do not bode well for the foreign investment climate in the country.
Declining foreign investments
While tourism took off in the Maldives in the 1970s as an extension of Sri Lanka tourism packages, it was not until the ‘80s that the country opened to foreign investment – and that primarily included the areas of resort management, telecommunications, accounting, banking, insurance, air transport, courier services, and some manufacturing. Foreign direct investment (FDI) contribute to a huge part of the GDP of the Maldives — to the tune of 88.9percent in 2015 .
To keep the investments inflows, the government has been inviting investors at various forums across the world to invest in large infrastructure development projects and acknowledges the importance of FDI in works of strategic significance.
India is one of the Maldives’ leading investors. In fact, in 2016, a summit was held in India for Indian investors to invest in a number of investment-ready projects in sectors like finance & banking, real estate, tourism, information and communication technology, and renewable energy.
But what does not support this economic imperative is the political instability – with reported violations of civil and political rights. The Maldives has also gone down several spots in the World Bank’s Ease of Doing Business rankings for 2017, ranking 135 out of 189 nations. It ranked 129th in 2016.
A slew of investment disputes with Indian corporations in the recent past has queered the pitch further for investments coming into the Maldives from India – be it GMR or Tatva or the most recent one involving Nexbiz.
In 2012, the Maldives cancelled an agreement with Indian firm GMR Infrastructure Limited to develop an airport in capital Male that was awarded in 2010. The $500-million (INR 2,750 crore) deal was the largest foreign direct investment for this Indian Ocean archipelago. The contract was terminated through a cabinet decision with 7 days’ notice, amid political protests, citing national interest concerns and bidding irregularities. Four years later in 2016, GMR was awarded compensation of approximately $270 million by the 3-member Singapore International Arbitration Centre.
The new Government in 2012-13 also renegotiated a $49 million waste management project signed between the earlier Government and India-based Tatva Global Renewable Energy.
In 2010, the government had awarded the development of 280 flats under the social housing programme in the land plots of the former Gaakoshi and Arabiyya School to Tata Housing. In exchange, the then government had also awarded two other land plots, Odion and Naadhee, for Tata Housing to develop and sell in open market. The current government unexpectedly sent a notice for termination of agreement with Tata Housing.
Another recent example is the Malaysian security firm Nexbis Solutions which won an arbitration award of $15 million as compensation for the Maldivian government’s termination of a US$39 million border control project.
While the Tatas might take the GMR route to arbitration, these decisions raise very pertinent questions about the long-standing bilateral ties the Maldives has with India and the sanctity of contracts.
Bilateral ties between India and the Maldives go back decades with the signing of a comprehensive trade agreement in 1981. Over the years, these ties have been nurtured and strengthened with both nations consistently supporting each other in multilateral fora such as the UN, the Commonwealth, the NAM and the SAARC. As of March-November 2015, bilateral trade between India and the Maldives stood at USD 206.6 million.
As a leading development partner of the Maldives, India has been instrumental in establishing many leading institutions here. India has also provided US$100 million Stand-by Credit facility to the Maldives, including long-term loans and revolving credit for trade. Under new Line of Credit worth US$40 million offered by the Government of India to the Maldives, the Overseas Infrastructure Alliance of India has been given a contract to construct 485 housing units in the Maldives.
Given the depth of the ties between the two countries, unilateral decisions that jeopardise or terminate contracts with Indian companies can be deleterious to bilateral relations between the two neighbours. It is for the government of the Maldives to address these issues.
As Indian businesses continue to look for new geographies for trade and investment, recent developments are likely to affect the flow of Indian Investments in the Maldives. Can the Maldives afford that?
The author of this article wished to remain anonymous.
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