Doing business in the Maldives

The Doing Business 2020 Report published by the World Bank compares 190 countries in terms of ease of doing business. After being assessed on various factors such as starting a business, dealing with construction permits, getting electricity, registering properties, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvencies, and employing workers, the Maldives obtained a score of 53.3 out of 100, and ranks at 147 out of the 190 countries. 

Maldives did well only in two areas; starting a business, and dealing with construction permits. In all the other areas, the country scored relatively low. 

MFR sat down with nine different key business operators,  in different sectors of the economy, and found the areas where almost all the businesses noted why it is difficult to do business in the Maldives. 

1. Difficulty in obtaining US Dollars

Most importers highlighted the difficulties faced in obtaining US dollars in order to make payments to international suppliers. The banks provide only about 20-30 percent of the required foreign currencies, and the rest has to be obtained from the market. With the operation of a lucrative parallel foreign exchange market, the rate is as high as MVR17.65 per US dollar as of 3 November 2021, while the official rate remains at MVR15.42. The 14 percent premium that has to be paid in order to make sure the goods are available in the market, adds to the costs

2. Unavailability of financing through banks

Trading very much relies on credit provided to major buyers who buy on bulk. Operators reported that at times, a 30 day credit may be extended to up to 90 days. One of the medium-sized importers MFR spoke to said they had over MVR3 million credit outstanding on average, while a large importer reported over MVR30 million as outstanding credit. 

With the mis-match in cashflows, and the difficulties in obtaining financing from banks, trading has become relatively challenging. 

When it comes of getting credit, The Doing Business Report puts Maldives at 144th rank out of 190, and a score of 35 out of 100. The regional average is at 53. 

3. Relatively high interest rates

The cost of financing, when available, is another major obstacle for business growth and expansion. All businesses interviewed assessed that a 12 percent rate on credit may be to high to ensure business sustainability and that perhaps rates in the range of 6-7 parent may be more reasonable.

4. Policies do not facilitate business

Majority of businesses complained about the difficulties in obtaining services from government ministries and authorities. Some said that the SME classification put in place by the Ministry of Economic Development (MED) "did not make sense," and explained how it excluded them from availing  privileges enjoyed by other businesses. 

The score of 55.9 (157th Rank) on trading across borders in the Doing Business Report 2020 supports this, as border compliance takes 100 hours and costs USD981 from importers, while documentary compliance takes 61 hours and costs USD 180. Border compliance in OECD countries takes only 8.5 hours and costs USD98, while documentary compliance in these countries take only 3.4 hours and costs USD23.5. 

5. MIRA policies

The Maldives Inland Revenue Authority (MIRA) guidelines and policies are detrimental to businesses, and in most cases acts as a major discouragement on doing business in the country. Examples highlighted by most businesses were GST being payable, even for sales on credit. Since GST is payable on incomes not yet received, in instances where about 90 percent is credit sales, cash flow difficulties results in large fines being incurred from MIRA. When this happens, they are required to ‘beg’ MIRA to enter into a settlement contract to be paid in installments. Most businesses reported being bound by such obligations to the tax authority. 

Although MIRA has been, at various events extolled on its successes in tax implementation, the country is ranked lower than similar smaller countries like Seychelles and Mauritius. Maldives ranking is at 119 out of 190, and scored 66.4 out of 100. 

6. Human resources

The Employment Act, in trying to protect mostly the rights of the workers, doesn’t adequately take into account the effects on the employers and as a result does not facilitate business. Local staff leave requests become a major challenge, and a cause of conflict in human resource management. The increasing dependence on expatriate labor also adds to the costs. 

Government attempts to encourage local employment and discourage expatriates, has added to the costs, and made it difficult to bring in expatriate employees legally.

In other areas like enforcing contracts, Maldives scored 52.5 and ranked 124th. It takes 760 days for a case to be completed in the Civil Court, as compared to 120 days in Singapore. On the Quality of Judicial Process Index, Maldives scored 5.5 out of 0-18 lower than the 7.1 average in South Asian countries.

Much needs to be done to improve the ease of doing business in the Maldives, to encourage entrepreneurship, innovation and economic growth.