Niccolo Machiavelli first said, “Never waste the opportunity offered by a good crisis.” Twenty twenty is a year dominated by the Covid-19 pandemic which is still causing economic turmoil around the world. Economic hardships create windows of opportunity where policymakers can reshape economies to eventually benefit from an economic recovery. Unfortunately, Mauritius has chosen to wait it out, throwing good money after bad, as if things could soon be back to normal.
It would be too much to expect a government beset by scandals, even in the first year of a fresh mandate, to muster the political courage to bring tough but essential reforms to the labour market or to the old-age pension system. But at least they could have put their economic promises into practice as set out in the Government Programme 2020-2024. The 72-day national lockdown was no excuse for failure to do so.
Contrary to what chapter 4 of the Programme suggests, “building the economy of the future” has not been on top of the government’s agenda. Maybe they were content to rest on their laurels with the classification of Mauritius as a high-income country on 1st July 2020. However, with a 14% contraction in GDP this year, the island will slip back into the middle-income status.
As part of the government’s economic growth strategy, “more incentives will be given to foreign talents” (par. 66), but the introduction of CSG and the drastic increase of the Solidarity Tax can only disincentivise them from coming to Mauritius. Government has vowed to “consolidate the partnership with Business and Industry with special emphasis on dialogue” (par. 70), but it is a dialogue of the deaf that is taking place between Business Mauritius and the finance minister on the CSG, leading to a court battle.
There are other hot issues where trouble is brewing. Particularly “with regard to tourism, Government will work with all stakeholders to re-engineer the whole industry” (par. 74). Instead, the “SUS Island” tourism branding has been a complete flop, the tourism promotion strategy is still unclear, and the so-called reopening of borders is just a smoke-screen of Covid-safe destination.
Meanwhile, the objective to “consolidate the image of Mauritius as a thriving international financial centre of repute” (par. 76) has been undermined by the European Union blacklisting. The Mauritian jurisdiction has lost the allure of one of the most preferred conduits for foreign investments in India. Being the least vulnerable to coronavirus disturbances, Global Business activities can contribute to lifting the island out of the economic crisis if they receive sufficient attention. Alas, authorities believe they can be strengthened solely by dint of regulations.
In the same vein, time is running out for “a paradigm shift in the development of the manufacturing sector” with a “focus on the promotion of innovation-led and technology-intensive production on building export competitiveness” (par. 78). These are not reflected into the external merchandise trade statistics. Domestic exports for the first nine months of 2020 were lower by 14.2% compared to the corresponding period of 2019, which was mainly due to the 23.8% decrease in manufactured articles. Total exports for 2020 is forecasted by Statistics Mauritius at around Rs 68.2 billion as against Rs 78.8 billion in 2019, despite sharp depreciation of the rupee.
As shown by the Mauritius Exchange Rate Index, in the year ended 30 November 2020, the value of the rupee fell by almost 12% against the currencies of its important trading partners. Consequently, the headline inflation rate for 2020 could be nearly twice the rate of 1.5% projected by the central bank staff one year ago. The Bank of Mauritius is no more the chief inflation fighter that it used to be.
Rather, it has become a fiscal agent of the public Treasury with its Rs 60 billion grant, which will not be paid back. Singling out Mauritius in this regard, the International Monetary Fund wrote that “the monetizing of deficits risks undermining the long-term independence and effectiveness of the central bank, since concerns may arise about its ability to keep inflation under control in the future. This would unanchor inflation expectations and add to pressures on the currency”, such as in Zimbabwe.
The rupee will remain all the more unstable as foreign exchange reserves are being depleted with the draw-down of two billion dollars to be credited in rupees to the Mauritius Investment Corporation. The latter could have been financed differently, but the inexperienced finance minister was outsmarted by business groups reluctant to open their capital structure, and by big banks willing to minimise concentration risks.
While lobbies get their pound of flesh, the population at large will have to foot the bill. In lieu of structural reforms, government took the easy option – printing money, raising taxes and going deeper into debt – in a year when it has been at a loss.