05/02/2016
Political Context
Mauritius enjoys a relatively stable political landscape. The country has a multiparty parliamentary democracy where the president is the head of state and the prime minister has full executive powers and heads the government.
The legislative elections held in December 2014 were won by the Alliance Lepep, a party comprised of the Militant Socialist Movement (MSM), the Mauritian Social Democrat Party (PMSD) and the Liberation Movement. The coalition secured a comfortable parliamentary majority and now controls 51 out of 69 seats in the National Assembly, with the MSM founder, Sir Anerood Jugnauth, becoming prime minister. The coalition's overwhelming victory and firm legislative backing is expected to support political stability and gives it a strong mandate to implement its policy program. The 85-year-old Sir Anerood Jugnauth has held the function of prime minister for a total of 16 years since his first appointment in 1982 and his experience and political acumen is expected to support stability.
Economic Overview
Mauritius continues to register positive growth amid international economic uncertainties. However, the economic slowdown in the Eurozone has affected economic growth given Mauritius’s dependency on tourists, trade and foreign direct investment (FDI). The economy registered a GDP growth rate of 3.5% in 2014, below initial projections of 3.7 to 4.0% due to the poor performance of the construction sector which declined by 6.4%, and the textile sector which grew around 1.5%. However, in line with the evolving structural change in the composition of the economy over the last decade, growth continued to be supported by the services sector, most notably, the financial services, trade, and ICT sectors which grew by 5.4%, 3.2% and 6.4% respectively in 2014. Growth in the tourism sector also accelerated to 4.1% in 2014.
The economic slowdown in 2014 led to reduced tax collection and increased public debt. Tax collection slowed to 20.6% of GDP compared to projected rate of 22.2% of GDP. This was particularly the case for income and profit taxes (4.2% compared to the projected 4.4% of GDP) and VAT (11.3% compared to the projected 12.5%). Grants were also lower than anticipated (0.1% against a projected rate of 0.6%). To compensate for this, the government delayed the implementation of the Pay Research Bureau and reduced expenditure on goods and services.
Nonetheless, primary deficit was 0.6% of GDP (higher than the 0.4% of GDP that was projected) and public sector net debt (statutory debt ceiling) increased from 54% of GDP in 2013 to 54.2% of GDP in 2014. The 2015 public budget will not consolidate public debt, and achieving the 2018 debt target will require relatively large fiscal consolidation measures moving forward. Debt as a share of GDP for the purpose of the debt ceiling is expected to be contained at 54.2% in 2015 based on assumptions for high economic growth and cheap financing. Overall, public sector debt is expected to be reduced to 58.6% of GDP after reaching 61.5% of GDP in 2014.
The monetary policy stance adopted by the Bank of Mauritius continues to be accommodative. Monetary policy easing continues in the light of the slowdown of the domestic economy and lingering global uncertainties. The repo rate has been maintained at 4.65% since June 2013. This more accommodative monetary policy stance was facilitated by the decline of the year on year inflation rate from 3.6% in December 2013 to 2.6% in 2014, in part related to subsiding food and oil international prices. The Bank of Mauritius continues its interventions in the foreign exchange market to build additional international reserves with parallel sterilization of the additional money supply to serve as buffers against a potential economic slowdown. Gross international reserves stood at $4.0 billion in 2014 (representing six months of import cover), up from $3.3 billion in 2013 (representing 4.8 months of import cover).
The current account deficit hovered around 8 to 9% of GDP in recent years, lower than in the years 2010-2011 due to lower deficit in goods and services and lower portfolio investment income. Exports were stable, reaching 52 to 55% of GDP in recent years. The current account is deemed to be structural, explained mostly by a decline in private saving, increased imports of capital goods, a deceleration of Mauritius’ main trading partners, and adverse terms of trade. A larger proportion of the current account deficit continues to be financed by foreign direct investment (FDI) and financial flows from global business companies. Over the course of 2014, the Bank of Mauritius accumulated gross international reserves of about $4 billion. Reserve import coverage by end of 2014 was equivalent to six months of imports of goods and services.
Social Context
Inequality is growing in Mauritius and relative poverty increased from 8.5% in 2007 to 9.8% in 2012. Income growth of the bottom 40% increased at an annual rate of 1.8% compared to 3.1% for the population at large over the same period. As a result, the middle class has shrunk in the last 5 years and vulnerability to falling back into poverty has increased. Efforts are needed to raise the quality of the education system, including the vocational sub-system to cater to private sector development needs, and reduce skills mismatches. Furthermore, a better coordination between sectors such as education, health, and active labor market programs could better tackle chronic poverty and facilitate labor market reintegration of those left behind.
Development Challenges
Mauritius’s main challenges include: increasing competitiveness through greater regional integration, creating a stronger environment for innovation, making growth more inclusive by addressing a scarcity of skilled human resources, and bolstering resilience to natural disasters and climate change.
Mauritius is set to accelerate reforms aimed at diversifying the economy, both in terms of climbing the value chain and reorienting exports toward emerging markets. Reforms with regards to trade barriers, education, and infrastructure will be crucial to achieving this. Moreover, the acceleration of fiscal consolidation is essential to achieving substantial efficiency gains in the budget and ensuring effective expenditure in priority areas such as the social safety net system, in order to cope with the impacts of a potential economic downturn.
