2009 Index of Economic Freedom

Quick Facts

Population:

• 0.3 million

GDP (PPP):

• $1.5 billion
• 19.1% growth
• 7.6% 5-year compound annual growth
• $5008 per capita

Unemployment:

• 0.0%

Inflation (CPI):

• 5.0%

FDI Inflow:

• $13.9 million

The 2009 Index is the first to assess the Maldives' level of economic freedom. The Maldives' score is 51.3, making its economy the 143rd freest in the 2009 Index. With an overall score nearly 8 points below the world average, it ranks 31st out of 41 countries in the Asia–Pacific region.

The Maldives has experienced five years of steady economic growth, but continuing measures to enhance competitiveness will be vital as the economy becomes more integrated with global markets. The Maldives scores above the world average in business freedom, fiscal freedom, monetary freedom, and labor freedom. The overall regulatory environment is streamlined and transparent. With no system of direct taxation, government revenue relies on import taxes, tourism taxes, and income generated by state-owned enterprises. The labor market operates under flexible regulations.

The Maldives' weaknesses include large government spending and widespread corruption. The public sector remains the largest source of employment, hiring over one-third of the labor force. The state owns key utilities and much of the land. Property rights are poorly protected.

Background Back to the top

The Maldives is constitutionally a democratic republic but has been ruled by President Maumoon Abdul Gayoom since 1978, and human rights, especially religious freedom, are limited. The parliament voted to introduce multi-party democracy in 2005, and the country is scheduled to hold its first multi-party elections by the end of 2008. Development is centered on the tourism industry. The economy has rebounded from the devastation caused by the 2004 Asian tsunami, and tourism and related services contributed 28 percent of GDP in 2007. Fishing employs about 11 percent of the labor force, and manufacturing provides less than 7 percent of GDP.

Business Freedom 83.2 Back to the top

The Maldives' regulatory environment allows significant freedom to conduct a business. Starting a business takes only nine days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days.

Trade Freedom 44.0 Back to the top

The Maldives' weighted average tariff rate was 20.5 percent in 2006. Import restrictions; import quotas on rice, flour, and sugar; import licensing; inefficient customs administration; weak institutional capacity; and corruption add to the cost of trade. Most imports are conducted through the government-owned State Trading Organization. Fifteen points were deducted from the Maldives' trade freedom score to account for non-tariff barriers.

Fiscal Freedom 95.8 Back to the top

The Maldives has neither a corporate tax nor a broad-based sales tax. Bank profits are subject to a profit tax of 25 percent. In the most recent year, overall tax revenue as a percentage of GDP was 20.5 percent. Revenues are collected from customs duties.

Government Size 0.0 Back to the top

Total government expenditures, including consumption and transfer payments, are extremely high and have continued to rise sharply since recovery efforts began after the 2004 tsunami. In the most recent year, government spending equaled 69.2 percent of GDP. The government has targeted many state-owned enterprises for divestment.

Monetary Freedom76.5 Back to the top

Inflation is relatively low, averaging 2.3 percent between 2005 and 2007. Although privatization is slowly moving forward, the government continues to operate state-owned enterprises and oversees prices through regulatory agencies. Ten points were deducted from the Maldives' monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom30.0 Back to the top

While foreign investment in the Maldives is welcome in certain sectors, it is subject to individual agreements with the government that last for an initial period of five to 10 years (renewable) for investments of less than $1 million. For larger projects, terms are negotiable. The government reviews all proposed investments before granting licenses. Foreign investors are required to pay annual royalty fees to the government. Bureaucracy can be non-transparent and prone to corruption. Dispute resolution can be non-transparent and burdensome. There are few restrictions on currency or capital transactions. There is little private land ownership. Foreign investors may lease but not own land.

Financial Freedom30.0 Back to the top

The Maldives' financial sector is dominated by banks and remains narrow. There is one partially state-owned domestic bank, and four branches of foreign banks operate in the country. The Maldives Monetary Authority functions as a central bank and regulates banking activities. Short-term financing is widely available, and credit is allocated on market terms. However, the relatively high cost of credits and limited access to financial services hamper entrepreneurial activity and the development of a more vibrant private sector. As part of the Maldives' ongoing efforts to enhance private-sector development, the government, which owns over half of the largest telecommunications company, has embarked on a mobile phone banking project with support from the World Bank.

Property Rights30.0 Back to the top

The Maldives lacks specific legislation to protect intellectual property rights and has not signed any related international agreements or conventions. The overall respect for and protection of property rights is weak.

Freedom From Corruption33.0 Back to the top

Corruption is a growing problem. The World Bank’s Control of Corruption Index shows a steady decline in recent years for the Maldives from +0.06 in 2003 to –0.15 in 2004, –0.32 in 2005, and –0.51 in 2006. Transparency International surveyed the Maldives for the first time in its Corruption Perceptions Index for 2007, and the Maldives ranked 84th out of 179 countries. In 2002, the parliament passed a bill on the prevention and punishment of corruption, outlining procedures for the confiscation of property and funds obtained through illegal means and broadening the mandate of the Anti-Corruption Board, which previously extended only to government employees, to include corruption in the private sector.

Labor Freedom90.1 Back to the top

The Maldives' flexible labor regulations facilitate overall employment and productivity growth. The non-salary cost of employing a worker is low, and dismissing a redundant employee is not costly.