Sunday, December 23, 2012

Maldives - a Plummeting Economy

The beautiful island nation of Maldives is in the news constantly for its climate-related troubles, but concerns regarding business challenges for foreign investors are no less important.

It is not surprising that any perceived threats to foreign investment in a country automatically plummets investor confidence and the economy suffers a heavy blow. The Maldivian economy thrives on tourism mainly, but also relies heavily on foreign investment. Some Indian companies seem to be at loggerheads with the new Maldivian government over contracts awarded by the previous regime. Although the present regime has assured Indian investors of support, recent events seem to point otherwise.
Maldives is the smallest Asian country located at just 1.5 meters above sea level, and suffers severe effects of global warming. Politically, it has not seen much stability since it gained independence from the British in 1965, and has been ruled by successive authoritarian governments, each bringing a new set of issues like increasing debts etc. The last government of President Mohamed Nasheed faced many challenges, both natural – like the 2004 tsunami – and man-made – such as unfriendly parliament Opposition majority. President Nasheed was forced to resign in February 2012 following country-wide streets protests, and his vice president, Mohammed Waheed Hassan, was sworn in as the new President.
Not surprisingly, this long time trend of upheavals has affected the economy adversely, although many countries are lending support to the Maldivian government. According to the U.S. State Department, the Government of Maldives (GoM) “receives help from the US as a beneficiary country under the Generalized System of Preferences (GSP) program for duty-free exports entry to the United States”, providing ease of access for businesses to the rich American market. Up until 2007, the Maldivian economy managed a growth rate of 6.6%. However, the recent political changeover, and the new regime’s subsequent efforts to dissociate itself from actions of the last one, is not doing any favors to the country’s economic situation.
Recently, two major Indian investment projects of GMR Infrastructure Ltd. and Tata Housing Group have been in the media limelight for facing onslaught of false charges and roadblocks in their efforts to complete their projects by the present regime. Since the contracts with these groups were awarded during the regime of former President Nasheed, popular consensus is that the opposition by most of the current coalition partners of the new government is based solely on political motivations.
As widely reported in the media, GMR group's largest private investment in South Asia, the over $500-million Ibrahim Nasir International Airport in Male, has run into rough waters, while a realty project being co-developed by Tata group subsidiary, Tata Housing, is also facing land-related issues in the country.

Not only is employee safety threatened, the political groups are demanding scrapping the whole GMR deal and awarding the project to local firms, even seeking to discredit the Indian High Commissioner Dnyaneshwar Mulay, and calling for the Indian Prime Minister, Manmohan Singh’s help in annulling the deal. Allegations of corruption are being levelled against GMR to make a strong case.
A GMR spokesperson has reportedly denied all allegations and accused the government of going back on its word, strongly condemning “Public statements and press conferences of some government ministers and coalition party leaders” which are “clearly aimed at arousing public sentiments against GMR and creating undue challenges…,”. The spokesperson clarified that, “GMR was granted required approvals and licenses to operate…made huge investments in development of arrival duty free area. However, the government later revoked the license citing that earlier the license was given in error. Similarly, the GoM passed an amendment to Business Registration Bill to restrict any foreigner to carry on Duty Free business, cargo clearance business, and bonded warehouse business at the airport. This step is clearly directed against GMR.” It would be interesting to see how the government resolves this issue since GMR made it clear it was willing to work with the GoM “within the framework of the concession agreement” having invested $200 million already but not losing its credibility to false allegations.
In the case of the $200 million Apex Realty project of Tata Group, despite signing a contract, the Maldivian government seeks to take over the site for its own use. Apex Realty was contracted to build 10,000 housing units to resolve severe housing shortage issues in Maldives owing to high population density and lack of basic infrastructure. The GoM has offered Apex Realty an alternate site, but other problems still persist in settling the issue amicably, not to mention discouraging future investment by this first time foreign investing firm.
Although the President Press Secretary Masood Imad was quoted in various media sources as saying, "This government will not target any investment, Indian or otherwise, unduly. The assurances given by the President securing foreign investments in Maldives are valid and stand true,", actions speak louder than words.
The Maldivian government is projected by some sources to be close to an economic collapse, but unable to appreciate the importance of investor confidence. Some media reports have quoted an official asserting that Maldives badly needs the promised $25 million bailout from India to be able to hold up its various commitments to its own people, and cannot afford to lose major Indian investors it is currently harassing due to politically motivated decisions. Perhaps the saving grace for Maldivian economy so far has been the flourishing tourism industry. The political situation notwithstanding, most resorts reportedly remain fully booked throughout the tourism season.
For long term gains, however, the GoM needs to carefully assess its options and resolve disagreements between the corporate and the political sectors to secure a stable investment future. Not just the Indian companies, but other investors may start looking for alternate partners in the region or even relocating existing businesses before long, and with the huge climate crisis looming in the background as it is, Maldives needs all the help it can get. It is time to rise above petty politics and encourage steady progress.  
SouthAsia, Dec 2012