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Second economic miracle: myth or reality?

24 mars 2015, 07:27

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Second economic miracle: myth or reality?

 

The first budget presented by Minister Lutchmeenaraidoo is betting on growth, driven by readily implementable ‘mega projects’, a boost to the port sector, improvement in business facilitation as well as promotion of SMEs to tackle the challenges of social equity and job creation. Will these measures be sufficient to achieve a second economic miracle?

 

Against the backdrop of a weak global economy, the Minister targets an ambitious growth rate of 5.3% for 2015/16 and sets rather aggressive implementation rates on private and public sector investment programmes, pushing investment rates to a high of 24.8% (19.4%, 2014). While Government is addressing bottlenecks in public administration, it may take time for these measures to be felt and missing the growth target could prove challenging to handle. At a growth of 5.7%, the budget deficit and debt to GDP ratio are estimated at Rs15.4bn (Rs12.6bn, 2014) and 54.2% (54.2%, 2014) respectively for 2015/16.

 

If actual growth ends up at 4.3% instead, we can estimate that, ceteris paribus, the budget deficit and debt to GDP ratio will deteriorate to Rs17.2bn and 56.2% (refer to graph). The effect of potential oil price increases on the sustainability of the Government finances should also not be ignored, given that any increase may not be passed on to the consumer, thereby reducing net revenues.

 

While Government introduced some measures to reduce public administration (such as e-payment facilities, the removal of licences, etc.), yet several new institutions are being created: the Mauritius Renewable Energy Agency, Financial Institutions Ombudsman, SME bank, and Financial Services Promotion Agency; all this means more government, more administration and less efficiency. Government also plans to invest Rs20bn to tackle the water supply problem. With the huge cost over-runs and poor quality delivered under the current road investment programme, we were hoping to see opportunities for public private partnership initiatives. With Government’s aim to reduce the debt to GDP ratio to 50% by 2018, private sector participation, through PPPs or disposals of Government run businesses, can help not only to contain public debt but also manage cost overruns as well as improve efficiency.

 

SMEs also feature prominently, with Government aiming to make them the backbone of future growth. Currently SMEs contribute to around 40% of GDP and 50% of employment in Mauritius. Compared to countries such as Singapore, where SMEs’ contribution to GDP and employment are around 50% and 70%, the potential of our local SME sector is under-exploited. The Budget’s focus on SMEs has its merits as a mechanism to tackle unemployment and drive growth. Despite a high concentration of SMEs per 1,000 inhabitants (Mauritius 98, Singapore 34 and UK 27), SMEs’ contribution to GDP indicates potential inefficiencies, and a lack of productivity and competitiveness. Further, given the high failure rates of SMEs, a robust framework is required to ensure that the Rs10bn allocated to the sector is well spent; relevant diagnostic tools should be available to help assess the suitability of SMEs to benefit from such assistance.

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We are fully supportive of the Government’s vision to create a Legacy Sovereign Fund and other longer term projects, such as transforming the port into a major regional hub or the new Petroleum Bill in terms of exploration/exploitation are commendable. However, relevant parameters should be put in place to encourage private sector participation and investment.

 

Overall, the Budget focuses on a pragmatic economic implementation programme, with a strong focus on immediate growth enhancing measures and job creation. For the miracle to happen, the public and private sectors must act fast! 

 

 

23 March 2015

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