RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/110
13 December 2002
(02-6848)
Trade Policy Review Body
TRADE POLICY REVIEW
MALDIVES
Report by the Secretariat
This report, prepared for the first Trade Policy Review of the Maldives, has been
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has,
as required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of the Maldives on its
trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr. S. Stamnas (tel. 022-739 5382).
Document WT/TPR/G/110 contains the policy statement submitted by the
Government of the Maldives.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on the Maldives.Maldives WT/TPR/S/110
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) E CONOMIC ENVIRONMENT vii
(2) T RADE POLICY FRAMEWORK vii
(3) T RADE POLICY INSTRUMENTS viii
(4) S ECTORAL POLICY DEVELOPMENTS ix
(5) P ROSPECTS x
I. ECONOMIC ENVIRONMENT 1
(1) O VERVIEW 1
(2) R ECENT ECONOMIC DEVELOPMENTS 2
(3) M ACROECONOMIC POLICIES AND DEVELOPMENTS 3
(i) Monetary and exchange rate policies 3(ii) Fiscal policy 6
(4) S
TRUCTURAL POLICIES AND DEVELOPMENTS 6
(i) Tax and expenditure reform 6
(ii) SOEs and privatization 7
(iii) Governance 7
(5) B ALANCE -OF-PAYMENTS DEVELOPMENTS 8
(i) Current and trade accounts 8(ii) External liabilities/debt 8
(6) T
RADE AND FOREIGN INVESTMENT PERFORMANCE 8
(i) Trade in goods 9
(ii) Trade in services 12(iii) Investment 12
(7) O
UTLOOK 13
II. TRADE AND INVESTMENT REGIMES 14
(1) O VERVIEW 14
(2) C ONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK 14
(3) S TRUCTURE OF TRADE POLICY FORMULATION AND IMPLEMENTATION 15
(4) T RADE LAWS AND REGULATIONS 16
(5) T RADE AND ECONOMIC POLICY OBJECTIVES 17
(6) T RADE AGREEMENTS AND ARRANGEMENTS 18
(i) Multilateral agreements 18
(ii) Trade-related technical assistance 19(iii) Regional agreements 19(iv) Bilateral agreements 21(v) Generalized System of Preferences (GSP) and Global System of Trade
Preferences (GSTP) 21
(7) I
NVESTMENT POLICIES AND PROCEDURES 22
(i) Regulatory framework 22(ii) Investment incentives and promotion 25WT/TPR/S/110 Trade Policy Review
Page iv
Page
ANNEX  II.1:  T ECHNICAL ASSISTANCE EVALUATION 26
III. TRADE POLICIES AND PRACTICES BY MEASURE 29
(1) O VERVIEW 29
(2) M EASURES DIRECTLY AFFECTING IMPORTS 29
(i) Registration, documentation, and customs clearance 29
(ii) Tariffs, other duties, and taxes 31
(iii) Customs valuation 37(iv) Import prohibitions and restrictions 38(v) Anti-dumping, countervailing, and safeguard measures 38(vi) Standards and other technical requirements 39
(vii) Government procurement 39
(viii) Local-content requirements 39(ix) State trading 39(x) Other measures 41
(3) M
EASURES DIRECTLY AFFECTING EXPORTS 41
(i) Registration and documentation 41
(ii) Export taxes 42
(iii) Export prohibitions, controls, and licensing 42(iv) Export assistance 42(v) Export-processing zones 42(vi) State trading 42
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 42
(i) Competition policy 42
(ii) Price controls and monitoring 43(iii) Protection of intellectual property rights 43
IV. TRADE POLICIES BY SECTOR 44
(1) O
VERVIEW 44
(2) F ISHERIES AND OTHER PRIMARY ACTIVITIES 44
(i) Main features 44(ii) Sectoral and policy developments 44
(3) M
ANUFACTURING 49
(4) S ERVICES 49
(i) Tourism 50
(ii) Telecommunications 52
(iii) Transport 53(iv) Financial services 54(v) Public utility services 56
REFERENCES 57
APPENDIX TABLES 59Maldives WT/TPR/S/110
Page v
Page
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Trade in goods and non-factor services, 1990, 1991 and 1997-2001 9
I.2 Composition of merchandise trade, 1997 and 2001 10
I.3 Direction of merchandise trade, 1997 and 2001 11
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Average MFN tariff rates by HS section, 2002 33
III.2 Distribution of MFN tariff rates, 2002 34
IV. TRADE POLICIES BY SECTORIV.1 Tariff averages by 2-digit ISIC category, 2002 46
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Main economic and social indicators, 2000 (unless otherwise specified) 1
I.2 Economic performance, 1996-01 2
I.3 Balance of payments, 1996-01 5I.4 External liabilities, 1996-01 8I.5 Stock of (non-tourism) foreign direct investment, March 2002 12
II. TRADE AND INVESTMENT REGIMES
II.1 Main trade-related legislation 16
II.2 Selected notifications to the WTO, 2002 17II.3 Royalties on garment exports, 2002 24
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Tariff structure 32
III.2 MFN tariff  escalation by ISIC 2-digit heading, 2002 35III.3 State involvement in enterprises, 2002 40III.4 Imports of staple foods, 1998-01 41
IV. TRADE POLICIES BY SECTOR
IV.1 Fishing, key indicators, 1996-01 45
IV.2 Tourism, key indicators, 1996-01 50
APPENDIX TABLES
IV. TRADE POLICIES BY SECTOR
AIV.1 MFN tariff statistics by ISIC categories, 2002 61Maldives WT/TPR/S/110
Page vii
SUMMARY OBSERVATIONS
1. The Maldives, a trade-dependent least
developed country (LDC), with per capita
income of over US$2,000, relies heavily on
tourism (one third of GDP, 70% of exports in
2001) and its related services (e.g.construction);  traditional fishing (6% of
GDP), is still important for many Maldivians.
Given its smallness and narrow economic
base, the possibility of graduation from LDC
status (deferred until 2003 at the earliest)particularly concerns the authorities.
(1) E
CONOMIC ENVIRONMENT
2. The Maldives' impressive growth rates
have been reduced as a result of the recent
slowdown in tourism-related expenditure(after a major expansionary phase), a
deterioration in the terms of trade from falling
world fish prices and rising oil prices, and
fewer visitors after the 11 September 2001
events.
3. Poor economic management also
weakened performance.  Escalating fiscaldeficits were accommodated by credit
expansion from the non-independent Maldives
Monetary Authority (MMA).  Currency
pressures led to the devaluation of the rufiyaa
in July 2001, which due to its peg to theU.S. dollar had appreciated considerably,
thereby helping to undermine Maldivian
international competitiveness.
4. External deficits remain substantial;
they can no longer be financed by official andprivate capital inflows.  However, foreign
exchange reserves remain at almost
three months of imports and the debt service
ratio is low (2001).
5. Although trade and investment have
been liberalized, deep-rooted structural
weaknesses remain, including the State's
prominent role in commercial activities, a
narrow tax base, and constraints on economic
governance.  Tax receipts rely heavily on
tourism (a bed levy and rentals on leased
island resorts), tariffs, and profits transferredfrom state-owned enterprises (SOEs).  The
introduction of a business profits tax on all
sectors (not just banking) and a property
rental tax on income from leasing is under
consideration.  It is envisaged that expenditure
reforms will include enhanced governmentcontrols and better prioritization.
6. A privatization programme launched
in 1999 is a longer-term priority.  Some SOEs
have already been partially divested.  The
main policy focus is to restructure andcorporatize SOEs, including rescheduling
public debt, with a view to the potential
privatization of some of them.  The Public
Enterprise Monitoring and Evaluation Board
oversees SOE performance, and implicitsubsidies are being reduced.
7. The main markets for Maldives'
exports are developed countries, especially the
EU (processed fish) and increasingly the
United States (garments).  Imports are
primarily sourced from East Asian economies,
especially Singapore, and the EU.  Sri Lankaand India are the main trading partners within
the South Asian Association for Regional
Cooperation (SAARC) Preferential Trading
Arrangement (SAPTA).
8. The investment regime lacks
transparency in parts.  Moreover,  the
Maldives has not been particularly successful
in attracting foreign direct investment (FDI),
except in especially tourism, but also fisheries
and garments.  About half of tourist resortsare foreign or jointly run and around
two thirds of the stock of non-tourism foreign
direct investment is seemingly with two SOEs
(telecoms and water/sewerage).
(2) T
RADE POLICY FRAMEWORK
9. Trade reforms have been undertaken
to foster economic development and
private-sector participation in the economy,
though trade liberalization is not specifically
included in the Sixth National Development
Plan, 2001-2005.  The Plan calls for making
the Maldives a "hub for regional free trade"WT/TPR/S/110 Trade Policy Review
Page viii
and for developing "a more diversified
economy with export-oriented services trade."
10. The Maldives grants at least MFN
treatment to all trading partners.  It benefits
from "special and differential treatment"
afforded to LDCs in the form of exemptions ordelayed implementation of certain WTO
provisions.
11. The Maldives maintains preferential
trading arrangements within the
SAARC/SAPTA framework, and supports theformation of the South Asian Free Trade Area
(SAFTA) and the vision for a South Asian
Economic Union.
12. Maldivian exports enjoy unilateral
preferences from many developed countries,especially under the Generalized System of
Preferences.  Preferential access for the
Maldives' few export items (mainly canned
tuna to the EU) is crucial and depends largely
upon its LDC status.  Additional SAARC LDC
preferences also apply.
13. Executive power is with the President
who is in charge of several portfolios in
sensitive areas.  The Constitution prohibits
foreign ownership of land.
14. Trade policy is formulated primarily
by the Ministry of Trade and Industries incoordination (on an ad hoc basis) with other
ministries.  To better coordinate trade policy,
a National WTO Committee comprising
relevant officials was established in May 2002.
More structured dialogue between the privatesector and policy makers may be required in
order to  meet policy objectives.
15. Apart from revised trade legislation,
few major changes have been made in recent
years to the Maldives' trade and investmentlegal framework.  Nevertheless, several
important legislative changes are under way
(customs valuation) or envisaged (investment,
intellectual property rights).  The Maldives, a
GATT Contracting Party before becoming an
original member of the WTO, seems to have
begun the process of ratifying the WTOAgreements, which are believed to be de facto
law.  National legislation implementing WTO
requirements will make the foreign trade
regime more transparent, rules-based, and
predictable, thereby increasing confidence of
traders and investors.
(3) T
RADE POLICY INSTRUMENTS
16. The customs tariff is the main trade
policy instrument, and a major source of tax
revenue (accounting for some two thirds of
total tax receipts).  All tariffs are bound,mainly at a rate of 30%, but some (3% of tariff
lines) are bound  at 300%.  Major changes to
duties and customs commodity classifications
in May 2000 seemingly lowered average rates,
although this could not be verified.  Theaverage applied MFN tariff (unweighted) is
20.8%.  Almost all duties range from 5% to
25%, the most common rate, and well over
half of the rates exceed 15%.  Tariff peaks of
200% on plastic bags and 100% on motor
vehicles, as well as a specific duty of Rf 0.30
per stick on cigarettes, are justified by theauthorities mainly on environmental and
health grounds.  There is a substantial gap
between applied and bound tariff rates,
currently of 18 percentage points, on average,
thus leaving considerable scope for theauthorities to raise applied duties;  so far it
would appear that they have not taken
advantage of this scope.  Applied tariffs on
149 tariff lines exceed WTO-bound levels;
some are almost double;  the authorities haveindicated their intention to take corrective
action.
17. The widespread granting of duty
concessions has accentuated the use of the
tariff as an industrial policy tool, andundermined its transparency.  These incentives
may distort producer decisions, accentuate
escalation, and intensify budgetary pressures.
In 2001, over one third of tariff revenue was
forgone through duty concessions,
18. Trade is being facilitated by greater
computerization in import procedures.Despite a seemingly adequate preparation of
the Customs Service;  the Maldives has yet toMaldives WT/TPR/S/110
Page ix
fully implement the WTO Customs Valuation
Agreement as relevant legislation remains to
be passed.  Minimum prices are currently used
for valuation purposes.
19. Few formal non-tariff barriers are in
place.  Import restrictions and prohibitionsapply for health, safety, security,
environmental or religious reasons.  All
imports require an Open General Licence,
which is granted automatically.  Import quotas
were eliminated in 1998, except on rice, sugar,and wheat flour.  In the absence of domestic
legislation, no contingency measures have
been used.  Foreign standards (e.g.
Australian, United Kingdom, United States)
have been required.
20. State involvement persists in many
important sectors (e.g. fisheries, distribution,
banking, construction, insurance, utilities).
SOEs are major suppliers to the Government
as well as traders (accounting for one third of
total imports and one quarter of total exports
in 2001);  a few SOEs (e.g. the State TradingOrganization (STO) and Maldives Industrial
Fisheries Company (MIFCO)) have diversified
into various activities.  No SOE seems to have
a de juris import monopoly;  nevertheless,
certain statutory or de facto monopolies (e.g.electricity, basic telecoms, water/sewerage,
airport/seaports management) are in place
and SOEs benefit from government assistance
(nominal rent on state land, loan guarantees).
The STO is allocated 70% (down from 85% in1998) of import entitlements for rice, sugar,
and wheat flour;  the retail prices of these
items are controlled at near STO levels to
ensure supplies at affordable prices.
Government procurement seems to havebecome more transparent through the
introduction of open competitive tendering and
transparency procedures.  The STO was until
recently the central purchasing entity for
public procurement.
21. Export controls affect live aquarium
fish, and timber;  exports of a few marinespecies are banned for environmental reasons.
A 50% export tax is levied on ambergris.
Some royalties paid by foreign investors underinvestment agreements act effectively like
export taxes as they apply to only exports;
those on garments vary depending on the
destination.  MIFCO's export monopoly at the
national level on canned and frozen tuna no
longer operates.  Export assistance is virtuallynon-existent.
22. The Maldives adopted consumer
protection legislation in 1996, but has no
competition policy.  It has specific regulators
of electricity and water utilities.  It has nointellectual property legislation, but intends to
comply with the provisions of the TRIPS
Agreement by end 2005;  it is preparing
copyright legislation..
(4) S
ECTORAL POLICY DEVELOPMENTS
23. Scarce and infertile land has made the
Maldives a net food-importing LDC;  most
agricultural activity entails  subsistence
farming.  Government intervention largely
involves the use of tariffs and state trading.
24. Fisheries development has been
dominated by the state-owned MIFCO butefforts to introduce competition are under
way.  Under the 2000 Skipjack Industry
Development Programme, which has divided
coastal fisheries into four geographical zones,
the Government licensed two privateprocessors/exporters to operate in one of these
zones.  MIFCO retains the exclusive right to
export processed fish from the other two
zones.  A floor price scheme, which sets
minimum prices for fresh fish, was retained.The Government has stated its intent to
privatize MIFCO.
25. The successful expansion of tourism
has reduced the Maldives' traditional
dependence on fishing.  New legislationincreased the maximum lease period for
islands  from 21 to 25 years on investments
below US$10 million, and retained the
maximum period of 35 years for larger
investments;  it also introduced a 50-year
lease under certain conditions.  Government
compensation was introduced for leaseholderstransferring facilities at the end of the lease.WT/TPR/S/110 Trade Policy Review
Page x
The Maldives Tourism Promotion Board was
formed in 1998.  A flat-rate bed tax of US$6
per night is levied on foreign tourists.
26. Other services are also receiving
increased attention to improve efficiency.  A
legal and regulatory framework fortelecommunications is intended to facilitate
the sector's opening when Dhiraagu's
monopoly expires in 2008;  new internet and
mobile phone operators are also envisaged by
the end of 2005.
27. No restrictions apply to  foreign bank
subsidiaries or branches, provided that
prudential licensing requirements are met.  No
specific licensing requirements apply to
insurance companies, and foreign agents andbrokers are allowed to operate.  Bank
supervision is being strengthened following
international (BIS) norms.
28. GATS commitments are limited to
certain business services;  the Maldives did
not participate in the extended basic
telecommunications or financial servicesnegotiations.
(5) P
ROSPECTS
29. The authorities believe that the
implementation of its multilateral
commitments will aid the Maldives' economicrecovery.  However, without appropriate
technical assistance, it will be very difficult to
implement WTO-consistent policies.  The
Maldives assessed its many assistance needs
in trade-related areas within the IntegratedFramework (IF), and has formally requested
coverage by the IF exercise.  It is seeking
bilateral and multilateral support to meet its
WTO commitments.
30. Continued structural reforms,
including trade and investment liberalization,and the pursuit of privatization could
strengthen competition, thereby improving the
economy's efficiency.  Tariff rationalization,
including lower and more uniform rates with
fewer exemptions, should facilitate better
resource allocation and reduce distortionscaused by this tax.  Revenue losses associated
with such reforms are of critical importance
given the narrow tax base.
31. The economy remains vulnerable to
external factors affecting tourism and fishing.Current fiscal deficits, if not corrected, may
weaken the Government's intention for reforms
(including privatization, a source of
Government revenue), thereby undermining
economic diversification.  Reform of keyservices, such as telecommunications,
transportation, and financial services, would
facilitate such diversification, by reducing
costs of doing business, and improve
international competitiveness.  Improved
service (GATS) commitments would raise
investor confidence and help attract neededforeign investment.
32. A major challenge for the Maldives
will be LDC graduation.  While the loss of EU
and SAARC (special) preferences will require
more re-structuring of fish processing,graduation represents a necessary first step in
the country's economic transition.  Continued
over-dependence on unilateral preferences
may retard the economy's export
diversification, and encourage inefficientindustries, like tuna canning, whose products
are only competitive in the EU with large tariff
preferences.
33. Trading partners can contribute
substantially to the Maldives' economicdevelopment by ensuring reliable, increased,
and non-discriminatory access to their
markets.