- Economic growth was 2.1% in 2016 due to the ongoing electricity crisis, but thanks to the new government’s efforts to resolve and clean up public finances, growth is projected to reach 3.4% in 2017 and 4.1% in 2018.
- The 2016 elections led to political change: the new President of the Union and the three island governors were all elected from the opposition.
- With a narrow economic base and a predominantly informal economy, the islands remain under-industrialized (10% of GDP), and the country is looking to adopt a regional strategy to address this issue.
Growth recovered slightly in 2016, at 2.1% (up from 1.0% in 2015), but was below the rate of population growth (2.4%). It is projected to rise to 3.4% in 2017 and 4.1% in 2018 thanks to efforts by the new government to sort out the electricity crisis and improve public finance management. The country made the electricity sector a priority in June 2016, improving the production capacity of the national water and electricity company MAMWE. The industrial sector is the main driver of growth, followed by services and agriculture. The most dynamic sub-sectors include fisheries, energy, information and communication technologies, and other services. The economic outlook is promising for 2017 and 2018 for two reasons. First, a second telephone company (Telma) began operating in December 2016 and, most importantly, the government officially opened a new power station in February 2017 to deal with the electricity crisis once and for all.
Since taking office in June 2016, the new government has also shown that it is determined to clean up public finances. It has taken strict measures to reduce the size of the civil service and improve domestic tax collection to finance its public investment policy. The 2017 Finance Act seeks to double the tax burden from 11.1% to 22.1%. Investment spending for 2017 is projected at 33.0% of GDP, up from 14.6% two years earlier. Budgetary difficulties in recent years caused the Public Investment Program to contract from 26% to 14.6% of GDP between 2012 and 2015.
The industrial sector is still at the embryonic stage, contributing less than 10% to GDP. In 2013, the authorities launched a strategy to improve the business environment by strengthening the rights and remedies of investors and creditors, creating structured public-private dialogue and training entrepreneurs in management software by Business Edge. Despite these efforts, investment is low and viable entrepreneurial initiatives are rare, indicating that many other obstacles remain, especially at the institutional level. Other hurdles include the high cost of production factors, difficult market access, weak economic governance and the state’s role in economic activity.
Aware that the private sector can create jobs and make growth more inclusive, the government is continuing its efforts in to improve the business environment in order to encourage structural transformation and diversification of the economy.