Dr the Honourable Renganaden Padayachy, Finance Minister, has delivered his second Budget Speech in a challenging context marked by the continued prevalence of COVID-19 worldwide, including in major trading partners of Mauritius. He has presented a roadmap for taking the national economy out of the current fragile and unbalanced growth environment, towards long-term resilient growth based on investment and confidence revival, as well as a new economic architecture centred on renewable energy and green industry.
Since the last budget, the authorities have pursued, and even extended, unconventional support policies to safeguard economic livelihood of people and stability of the financial system. In parallel, commendable efforts have been made to procure COVID-19 vaccines for the Mauritian population, with the objective of attaining herd immunity by the end of 2021. However, upkeeping of public health through lockdowns and border restrictions has unsurprisingly, had adverse impact on the economic standing of the country, culminating in a downgrade of Mauritius by Moody’s in March 2021 on account of weakening of fiscal and economic strength.
The IMF is currently projecting the global economy to grow by 6.0% in 2021, up from a contraction of 3.3% last year. However, divergent recoveries underlie this projection, with advanced economies better poised to bounce back faster, given their wider fiscal space that has been enabling more effective support measures and given their easier access to vaccines. With regard to monetary policy, at their latest policy meetings held on 27 – 28 April and 10 June respectively, the Fed and the ECB have pledged to maintain an accommodative stance and to pursue their asset purchase programmes designed to provide liquidity and support their macroeconomies, with a view to bolster employment creation and achieve pre-COVID activity levels soon. The Fed has, however, hinted that asset purchases may be tapered should the economy show rapid progress – in this context the upcoming meeting next week on 15 – 16 June should shed additional light on the future direction of policy and consequently, on the trajectory of the US dollar.
On the domestic front, economic growth was already decelerating prior to COVID-19, which in turn triggered a contraction of 15.2% in 2020, with nearly a third (4.7%) emanating from tourism sector. The authorities are currently projecting a growth of 9% for 2021/22. Headline inflation, which has been declining since 2017, experienced an increase from 0.5% in 2019 to 2.5% in 2020 despite lower economic activity, highlighting cost push pressures. Unemployment rate trended downward since 2015 and reached a 10-year low of 6.7% in 2019, but then rose to near double-digit (9.2%) in 2020, despite consequential support measures from the authorities. After almost a decade, the Current Account Deficit to GDP ratio breached into double-digit territory (12.0%) in 2020, driven mainly by the drying-up of tourism earnings. Public sector indebtedness has been on the rise, with Public Debt to GDP peaking at 91% at March 2021. Increasing prevalence of external debt since Dec 2019 signals potential vulnerability in debt servicing, more so if rupee depreciation accelerates. After reaching a low of 4.9% in 2019, Non-Performing Loans to Total Loans rebounded to 6.1% at September 2020, reflecting impact of COVID-19. Extension of support measures by the Bank of Mauritius for a further year should uphold this key asset quality indicator. Budget Deficit to GDP evolved in a stable range of 3% – 3.5% up to 2018, rocketed to 13.6% in 2019/20, mainly due to COVID-19 response, but is projected to decline to 5.0% in 2021/22.
This budget proposes an important government infrastructure investment programme to the tune of MUR 65 billion over the next 3 years, reasserts commitment to construct 12,000 houses by 2024, and plans to enhance the transport infrastructure network. These have the potential to crowd-in much needed private investment, which has lately not exceeded 15% of GDP. Diverse policies have been announced to incentivise the shift to renewable energy with a view to promote durable development. As from 15 July 2021, Mauritius will start accepting vaccinated tourists with a view to revive the hard-hit tourism industry. The UNDP is collaborating with the authorities to cater for new segments and the Invest Hotel Scheme is being relaxed to attract long-stay tourists.
The authorities will upgrade financial sector legislation, further empower regulators in their fight against financial crime, and remain committed to work towards FATF compliance. Digitisation initiatives have been announced, including in Blockchain and AI space, and notably a pilot project by the Central Bank on a Digital Rupee. The country is further opening-up to foreigners through relaxation of permits and investment schemes. Agricultural operators including planters, farmers and fishermen will benefit from financial facilities, to enhance food security. Biotech and pharmaceutical manufacturing will be promoted, same for housing ownership and digitisation of the Mauritian economy. To ensure inclusive development, educational infrastructure will be upgraded while social schemes will be widened and deepened.
Revenue measures in the budget include an additional levy of Rs 2 per litre of Mogas and Gas Oil to finance vaccination programmes, a 10% increase in excise duty for alcohol and tobacco products, increase of 2% in taxes and duties on betting for horseracing. The underlying philosophy appears to be that this budget would eventually be financed by the expected upturn in economic activity spurred by the numerous incentives and schemes outlined.
By Jameel Khadaroo, Partner - Consulting, Deloitte Mauritius