Despite challenges, the Mauritian economic miracle continues to perform
Mauritius has for the past 30 years fostered a reputation for stability and sound fiscal management. The country has not experienced a recession since 1980. Gross domestic product (GDP) growth over the course of the last decade averaged 3.9 per cent. Estimates for 2018 and 2019 suggest that this trend is likely to continue, with Moody’s expecting real GDP growth of 3.9 per cent for both years. The African Development Bank (AfDB) in its 2018 African Economic Outlook pins GDP growth for 2018 at 4.2 per cent and 4.3 per cent in 2019.
The Mauritian Government is seeking to transform the island nation into a high-income economy and the country’s overall track record in instituting economic reforms leads some credence to the possible success in achieving this goal. Growth will be supported by public sector support in investment projects with the Government’s Public Investment Programme (PIP) headlining these efforts. The programme seeks to provide public investment to support urban and transportation growth and development. Further recovery of private sector investment throughout 2018 will likely support public investment initiatives too.
Most recently the country’s authorities have been attempting to address challenges of international scrutiny on tax avoidance. The Global Business Companies (GBC) sector, an important part of the overall make-up of the Mauritian economy, is seeking to adjust to new international paradigms around tax avoidance. Examples of these efforts have already been completed, with the amendment to the country’s existing Double Taxation Avoidance Agreement with India being one. India accounts for nearly half of total outbound investment from Mauritius and this action by itself demonstrates the seriousness with which the local authorities are taking the issue of tax avoidance.
The GBC sector in general will need to adjust over time and come into compliance with Financial Action Task Force on Money Laundering (FATF) standards, with a focus on anti-money laundering (AML) and combating the financing of terrorism (CFT) said the IMF in late 2017 at the end of its Article IV consultation with Mauritius. GBC activities provide a significant source of liquidity for the banking sector, so authorities will need to be cautious in the way in which they go about instituting new standards.
Currently the Government is working on a Financial Services Sector Blueprint which aims to assess the best way in which to adopt international best practices whilst maintaining competitive advantages. More details of further changes in the tax system are likely to be included within the Blueprint. The authorities have sought to position Mauritius as an international finance centre and a gateway for investment between Asian and African markets. Thus far Government efforts have been broadly successful in establishing Mauritius as a regional services hub for Africa and have increased the stability of the overall Mauritian economy.
Robust performance in tourism was a welcome figure to see for 2017. According to Statistics Mauritius overall tourist arrivals for 2017 increased 5.2 per cent. The Bank of Mauritius has also revised its forecast for tourism earnings for 2018 upwards to MUR 62.5 billion from MUR 61.6 billion. This forecast is 3.7 per cent higher than 2017 earnings of MUR 60.3 billion. In 2016 the central bank also loosened its monetary policy, dropping its key interest rate to 3.5 per cent. Meanwhile inflation rose in 2017 as a result of higher energy and food prices to 3.7 per cent, up from one per cent in 2016. In line with this the Consumer Price Index registered a net increase of 4.2 per cent throughout 2017. The AfDB suggests that higher energy and food prices are likely to hurt the economy’s overall current account balance and add further inflationary pressure in 2018. The bank expects headline inflation to reach 4.6 per cent in 2018. The current account deficit increased to 5.8 per cent in 2017, up from 4.4 per cent of GDP in 2016, and will likely widen further throughout 2018 off the back of public investments. Mauritius’ small tax base, and with a projected increase in recurrent expenditures, the space is limited within which policymakers are able to work to support public investment initiatives.
The IMF notes that higher tax efficiency could yield additional revenues of about 0.8 per cent of GDP. Overall the situation for Mauritius is broadly positive. Key considerations to take into account are the way in which authorities look to gradually introduce reforms to bring the country into global tax compliance and the country’s strong institutional framework. Government-led economic reform has had a positive effect on Mauritius since independence in 1968 and has changed the country from a low income agricultural nation to a diversified economy based principally on industry, finance and tourism. There does not seem to be significant evidence to suggest that there will be a deviation from this trend in the near future.