Mauritius

Since the outbreak of the global financial crisis, government policy has been to press ahead with reform and diversification while preparing the economy for an eventual global recovery.  The aim is to make the country more resilient to external shocks and to increase its competitiveness in global markets.  A key element is a focus on higher value-added services such as information and communications technology.

Gross domestic product (GDP) growth in 2009 of 2.8% was well below the previous year’s 5.1% despite substantial government stimulus measures, reflecting a sharp fall in external demand for textiles and tourism services following the global economic crisis, especially in European countries, Mauritius’ main trading partners.  Tourist arrivals in 2009 were down 6.4% to around 870 000 but earnings fell more: 13.4% to 1.2 billion US dollars (USD).

Growth is expected to pick up to 4.2% in 2010 and 4.7% in 2011 with the anticipated global economic recovery and the government’s fiscal and monetary stimulus package.

The overall fiscal balance as a percentage of GDP showed a deficit of 3.3% in 2008 and 3.6% in 2009, with the shortfall projected to rise to 4% in 2010 before falling back to 3.3% in 2011.  The Bank of Mauritius cut the repurchase (repo) rate – the central bank’s main policy interest rate – to 5.75% by the end of 2009 while headline inflation tumbled to 2.5%, its lowest rate for more than 20 years, from 9.7% for 2008.  Last year, the current account deficit was 8.6% of GDP and this is projected to widen to 9.5% in 2010 before narrowing again to 9.1% in 2011.

Gross foreign direct investment (FDI) in Mauritius, mainly from France and Britain, the former colonial powers, mainly goes to tourism, real estate and the financial services sector.  Mauritius remains one of the few African countries whose international reserves still remain strong, despite some outflows in late 2009.  Its domestic banks are profitable, well-capitalised and liquid. Government measures helped limit job losses in 2009, with unemployment increasing only marginally to 7.4% from 7.2% in 2008.

Major investments in infrastructure and education are necessary to support the shift towards a more services-oriented economy, especially the country’s development as a regional centre for information and communications technology.  Such measures will complement a reputation for good governance, a business-friendly environment and solid social indicators, helping to support growth over the medium to long term.

In 2009, the economy grew 2.8 %, down from 5.1 % in 2008, with the main contributors being agriculture with 0.6 % ; financial services, 0.5 % ; real estate, renting and business activities, 0.7 %; and transport, storage and communications, 0.6 %.  By category, the primary sector accounted for 0.6 % of overall growth, the secondary sector 0.4 % and the tertiary sector 1.8 %.  In 2009, the primary sector accounted for 4 % of GDP, the secondary sector 27 % percent and the tertiary sector 69 %.  The primary sector alone grew by 13.5 % in 2009, up from 1.5% in 2008; the secondary sector grew 1.3 %, down from 5 % and the tertiary sector expanded 3 % compared with 5.8 %.

The slowdown in 2009 was attributed to weaker external demand for textiles and tourism services due to the global financial and economic crisis, especially in European countries, the country’s main trading partners and source of tourist arrivals.

Gross capital formation as a percentage of GDP rose to 28 % in 2009 from 27.3 % in 2008, reflecting an increase in private sector investment to 23.8 % from 23.1 %, while the public investment rate remained unchanged at 4.2 %.  The savings rate declined to 13.6 % from 16.9 % in 2008.  Gross capital formation by volume is estimated to have increased by 5.7 % in 2009 and is projected to grow 7.3 % in 2010 and 7.6 % in 2011.

In terms of aggregate demand, final consumption expenditure as a percentage of GDP is estimated at 87.9 % in 2009 compared with 87.4 % in 2008.  Total final consumption expenditure grew 2.5 % in 2009, down from 6 % in 2008.  Household spending grew 2.1 % and government spending was up 4.9 % in 2009, compared with 7 % and 0.7 %, respectively in 2008.  Lagging external demand will continue to be a drag on Mauritius but exports are expected to gradually recover.

The projected growth rates of 4.2 % in 2010 and 4.7 % in 2011 would be below the country’s potential performance and take into account a possibly weak and uncertain global economic recovery.  Given slower growth and despite labour market reforms, the unemployment rate is estimated to have worsened to 7.4 % in 2009 from 7.2 % in 2008 and it is likely to stay at this level in 2010 -- provided that public infrastructure projects proceed as expected. 

In order to stimulate economic growth and mitigate the adverse effects of the global economic downturn on the Mauritian economy, the government pursued an expansionary macroeconomic policy in the first half of 2009.  The 2009 budget included additional spending over 18 months to build on a December 2008 stimulus package.  The key focus was on infrastructure projects and the preservation of jobs.  The government specifically aimed to help small and medium-sized enterprises (SMEs), the tourism sector and construction.

The 2010 budget, announced in November 2009, is the first to be based on the calendar year and will see additional spending carried through to the end of this year, with the government focused on a full range of infrastructure projects in an ambitious 172.2 billion Mauritian rupee (MUR) public-sector investment programme.  There was no increase in value-added tax but income tax thresholds were raised by 3.3 % to 6.3 % above the rate of inflation.  From January 2010, the government hiked salaries by 3.5 %, subject to a cap of MUR 420 per month, with retirement pensions rising by the same amount.

Total government revenue and grants as a percentage of GDP rose from 20.6 % in 2008 to 22.2 % in 2009 and it is projected at 21.9 % and 22.1 % in 2010 and 2011, respectively.  Mauritius depends heavily on taxes, at 19 % of GDP last year when grants totalled just 1 %, while other income such as sales of goods and services, and fines, penalties and forfeits was also small at 2.2 % of GDP.

Total government expenditure and net lending as a percentage of GDP increased to 25.8 % in 2009 from 23.9 % in 2008 and is projected at 25.9 % and 25.4 % in 2010 and 2011, respectively.  Total current expenditure was estimated at 17.6 % of GDP in 2009, or 13.9 % if interest repayments are excluded, while capital expenditure was 5.5 %. 

The overall fiscal balance as a percentage of GDP showed a deficit of 3.6 % in 2009, up from 3.3 % in 2008, with the shortfall put at 4 % this year and 3.3 % in 2011.

In order to safeguard its spending commitments in case revenue fails to meet budget targets, the government has sought and obtained precautionary budgetary support loans from the African Development Bank (AfDB) and the IMF, although it is unclear whether it will eventually draw from these loan facilities.

The central bank continues to pursue a monetary policy aimed at the “orderly and balanced economic development of Mauritius.”  Its Monetary Policy Committee (MPC) has cut interest rates progressively to support government efforts to stimulate the economy.  In March 2009, the Bank of Mauritius cuts its main policy interest rate by 100 basis points to 5.75 %, bringing the cumulative reduction since October 2008 to 250 basis points.  At its October 2009 meeting, the MPC decided to leave interest rates unchanged on the view that the economy was on the upturn and that the outlook for inflation would continue to improve in the short term.  It is expected that the central bank will start to raise interest rates again in 2010 as world growth picks up and inflationary pressures increase.

Money supply growth continued to slow in the first half of 2009 and stood at 8.1 % at the end of the year for broad money liabilities (BML) despite the easing in monetary policy designed to boost the economy.  Net credit extended to the government rose by 6.1 % in 2009 but was only up 0.9 % to the private sector where companies have complained of limited access to funds as banks became more cautious.

Inflation meanwhile fell sharply by end-2009 to 2.5 % - its lowest rate for more than 20 years - from 9.7 % in 2008.  The drop was largely due to a sharp fall in food and transport prices. Inflation is projected to rise to 4.5 % this year before easing to 4% in 2011.

Since 2007, the Mauritius rupee has appreciated against the US dollar, Euro, Pound Sterling and the Japanese yen.  From March to December 2009, the central bank estimates that the local currency gained 12 % against the dollar as the US currency weakened.  However, for this year and next, the dollar is expected to firm and the Mauritian rupee could come under additional pressure because of the island’s fiscal and current account deficits.

In 2009, exports of goods and services fell 7% to MUR 130 billion, reflecting weaker earnings from re-exports and ships’ stores and bunkering. Despite the overall downturn, sugar, textiles and fish, which account for more than three-quarters of exports, rose by 6.6 %, 2.4 % and 20.9 %, respectively.  Imports of goods and services dropped 11.1 % to MUR 159 billion, largely reflecting lower oil costs.  The trade deficit as a percentage of GDP improved to 18.7 % in 2009 from 21.3 % in 2008.  Exports of goods and services amounted to 26.5 % while imports stood at 45.2 % of GDP.

The current account deficit is estimated at 8.6 % of GDP in 2009 and is projected to rise to 9.5 % in 2010 and 9.1 % in 2011 but the wider balance of payments is expected to show a small surplus of around MUR 5 billion on the back of higher private capital inflows and foreign official disbursements.

In the first nine months of 2009, central bank figures put gross FDI for Mauritius at MUR 6.3 billion, coming mostly from France and Britain. As of November 2009, net foreign reserves were enough to cover some 42.6 weeks of imports and they are expected to rise slightly this year and next.

Total government debt as a percentage of GDP stood at 49.7 % at the end of the 2008/09 fiscal year, rising to 50.5 % at the end of calendar 2009.  This is projected to stand at 50.4 % in 2010 and 49.8 % in 2011.  The foreign component of the debt was 6.5 % of GDP in 2008/09, rising to 8 % at end-2009, and it is projected to rise to 8.8 % in 2010 and 11 % in 2011.

Total public sector debt came to 58.6 % of GDP at the end of the 2008/09 fiscal year and 59.6 % at end-2009.  This is projected at 58.7 % in 2010 and 57.7 % in 2011.  The foreign component of total public sector debt was equal to 10.4 % of GDP in 2008/09, 10.5 % at end-2009 and is expected to increase to 10.7 % in 2010 and 11.4 % in 2011.

 

In the 2010 World Bank Doing Business indicators, Mauritius was ranked 17 out of 183 countries, improving from 24 in the 2009 survey and showing the country as a strong reformer. Mauritius ranks particularly strongly in indicators on starting a business, protecting investors and paying taxes.  In addition, the World Economic Forum ranked Mauritius 57 out of 133 countries in its 2009-10 global competitiveness index, coming behind only South Africa on the African continent.  However, the Investment Climate Assessment (ICA) of the country in 2009 (a collaborative effort between the World Bank, the African Development Bank and the Mauritius Board of Investments) identified a number of constraints to growth and diversification, including a low-skilled labour force (especially for exporting firms), infrastructure deficiencies, market informality and the difficulty of accessing funds in the fallout from the global financial crisis.  The report recommended measures to support exports, improve private sector research and development, upgrade skills and human resources and improve access to finance.

The financial system proved resilient to the global financial crisis because of the limited exposure of the domestic banks which are not only profitable but are also well-capitalised, liquid, and boast improved asset quality.  Apart from focusing on traditional and conventional banking activities involving less risk, the regulatory and supervisory framework in place also helped them avoid problems.  The 2009 ICA report showed that access to credit tightened as a result of the crisis.

The stock market fell sharply in early 2009, reflecting growing uncertainty about the domestic economic outlook, increased risk aversion and a reversal of capital flows.  From the trough in March, however, the market picked up strongly, following the global lead.

Government policy is focused on supporting growth and preparing for the eventual global recovery, with an emphasis on diversification to make the economy more resilient to external shocks and increase its competitiveness in global markets.  Investment in education and infrastructure is vital if the shift towards a more services-orientated economy is to succeed.

Another key element of diversification is the development of fishing and tourism, which was hit hard by the global slump.  In first 11 months of 2009, tourism earnings fell 13.4 % while tourist arrivals declined 6.4 % for the year.

The tourism sector, which in 2008 accounted for 9 % of GDP and nearly 25 % of all foreign-exchange earnings, is expected to return to trend growth rates as demand picks up in 2010 and beyond.  The financial sector, which accounted for 10.8 % of GDP in 2008 and 11.6 % GDP in 2009, should also recover as economic activity increases, helped especially by growth in India, for which Mauritius is a major conduit of foreign investment.  A recovery in global trade will benefit the country as an international shipping hub, as will new investment in port infrastructure.

In early November 2009, the country reached a major milestone when the last consignment of raw sugar was shipped abroad.  Export production will now focus on refined sugar as the country faces greater competition and the end of European Union preferences.  Since 2006, the price of raw sugar exported to the EU has been reduced in stages from EUR 523.7 to EUR 336 per tonne while its duty-free export quota of 500 000 tonnes has been steadily cut.  Mauritius will now share an annual 545 000-tonne quota with Zimbabwe, and from 2015 the EU market will be fully liberalised and these quotas abolished.  It is estimated that sugar production in 2010 will be around 480 000 tonnes, below the long-term target of 500 000 to 550 000 tonnes due to adverse weather conditions, with a growth rate of 1.1 % compared to 21.1 % in 2009.

The government has tried to boost job creation through legislation and as part of its overall stimulus measures but unemployment remains a concern.  The Mauritian labor force is estimated to have increased from 559 400 in 2008 to 567 700 in 2009 while those employed rose from 519 000 to 523 800, giving jobless totals of 40 400 and 43 900, respectively.  Job losses were particularly significant in the textile sector, which was adversely affected by weak external demand and the end of EU and US quota restrictions on Chinese exports in 2008.  A number of government initiatives have enabled many foreigners, especially Indians and Chinese, to buy property and so gain permanent residency and citizenship in Mauritius under schemes which lay down minimum investment requirements.

Mauritius has a low-rate tax system and recent reforms have aimed at making it more transparent, efficient and conducive for investment.  Individual residents of Mauritius are taxed on worldwide income.  All personal income is taxed at a flat rate of 15 % above the MUR 215 000 minimum threshold while the corporate tax has recently been reduced to 15 % and rental income attracts a similar levy.  VAT is 15 %, with capital gains tax charged at between 20 % and 30 %.  Employees pay 3 % of earnings up to a ceiling of MUR 7 990 and employers pay 6 % for social security and pensions.  Taxes on casinos and gaming houses are being reviewed so as to attract investment in the leisure, hospitality, and entertainment industry.

The Mauritius Revenue Authority (MRA), under the supervision of the Ministry of Finance and Economic Empowerment, manages the tax system after it become operational three years ago with the aim of widening the tax base.  Tax revenue remains by far the largest part of government finances, with grants and other sources of income very small in comparison.

The governing Alliance Sociale (AS) coalition, headed by the Prime Minister and Labour Party leader, Navin Ramgoolam, won office in 2005 on a promise of reforms.  A general election is due in July 2010, with the battle lines drawn between three major parties -- the Labour Party, the Mouvement Socialiste Militant (MSM) and the Mouvement Militant Mauricien (MMM).

Mauritius enjoys a reputation for good governance and stability. In 2009, Transparency International ranked the country highly among its African peers on corruption perceptions and placed it 37 in the world.

In the 2009 United Nations Human Development Report, Mauritius was ranked 81 out of 182 countries based on 2007 data but its Human Development Index (HDI) score made it the third highest in Africa after Libya and the Seychelles.

Mauritius is on its way to attaining its Millennium Development Goals (MDGs).  It has a low infant mortality rate, at 14.6 per 1 000 births in 2009, well below the average of 83.9 for the continent and 51.4 for developing countries.  Similarly, the under-five mortality rate (per 1 000) is estimated at 14, among the lowest rates in the world.  The maternal mortality ratio (per 100 000 live births) is 15.

Life expectancy is 72.1 years compared with 54.5 years for Africa, 65.7 years for developing countries and 77.1 years for developed countries.  The percentage of adults (ages 15-49) living with HIV/AIDS stood at 1.7 % in 2008.  The population with access to water and sanitation is 100 % and 94 %, compared to African averages of 68 % and 37.6 %.

Mauritius enjoys full primary school enrolment ratio and a 73 % rate in secondary education, compared to 43.5 % for Africa as a whole.  Tertiary education enrolment is 41 % while the adult literacy rate is 87.4 %.  Public expenditure on education as a percentage of GDP is 3.2 %, against a 4.5 % African average while social security and welfare runs at 5.1 %.

Poverty levels in Mauritius are low but have risen slightly in recent years. Those living below the poverty line were put at 8.7 % of the population in 2006/07, up from 7.8 % in 2001/02.