allAfrica.com: Mauritius: Economy in the Face of a Difficult International Environment (Page 1 of 1)

Soaring food prices and shortages mean that 77m people of Pakistan's 160m population are food insecure, a 28% increase over the past year, according to UN World Food Programme estimates.

Global economic prospects

The global economic outlook remains quite bleak. According to IMF projections, the world economy will continue to slow down in the second half of 2008. World GDP growth rate is expected to drop by 0.9 percentage points from 5 percent in 2007 to 4.1 percent in 2008. With business and consumer confidence falling, growth in advanced economies is projected to average 1.7 percent for 2008, down from 2.7 in the previous year. Business activities in emerging and developing countries are also losing steam. For instance, the expansion of China and India, the powerhouses of global growth, are forecasted at 9.7 and 8 percent respectively in 2008 as compared to 11.9 and 9.3 percent in 2007. Growth forecast for Sub-Saharan Africa is anticipated to fall from 7.2 percent in 2007 to 6.6 percent in 2008.

The weakening of the global economy is mainly attributed to the contraction of consumer demand resulting from constraining credit conditions in the more developed economies, in particular the US and UK and the erosion of purchasing power worldwide due to high energy and food prices.

Rising oil and food prices have in fact intensified the inflationary pressure on the global economy, especially in emerging and developing countries. Consumer prices in advanced economies are likely to average 3.4 percent in 2008 relative to 2.2 percent in 2007. Meanwhile, the projected inflation rate in developing economies may well rise by 2.7 percentage points from 6.4 to 9.1 percent. Energy and commodity prices look set to stay high in the foreseeable future given an inelastic demand and sluggish responsiveness of supply to price increases.

It means that policy makers across the globe must face the daunting challenge of balancing the contradicting objectives of managing the downside risks to economic growth and controlling inflation.

How is Mauritius faring in terms of growth, jobs and consumer prices?

The Mauritian economy continues to show resilience. GDP in the first quarter of 2008 expanded by 5.8 percent over the corresponding quarter of 2007. Based on available data, CSO predicts that growth for the year 2008 is likely to be in the region of 5.7 percent, higher than the 5.4 percent achieved in 2007.

Growth is being driven by higher exports of services principally in the form of tourist earnings, increased private investment in non-residential buildings linked to the construction of IRS villas, hotels and shopping centres and a rise in consumption expenditure. It should be noted, however, that exports of goods actually contracted as illustrated by EPZ exports falling by 5.8 percent in the first quarter of 2008 compared to the corresponding quarter of 2007.

At the sector level, the expansion of Services accounted for much of the increase in business activity during the first quarter of 2008. Wholesale and Retail Trade, Transport, Storage and Communications, Financial and Business Services and Tourism as well as Construction contributed the most to the overall economic growth rate.

The Continuous Multi-Purpose Household Survey (CMPHS) for the period January to March 2008 reveals a relatively buoyant job market. The number of people aged 16 and above who were in employment during the first quarter of 2008 rose by 21,500 to reach 508,200 compared to 486,700 in the first quarter of 2007, that is an increase of 4.2 percent.

The number of unemployed in the first quarter of 2008 stood at 45,600, down by 5,800 compared to the same period last year. The actual unemployment rate for the first quarter thus works out lower at 8.2 percent relative to 9.6 percent for the corresponding quarter in 2007. This follows a decline in the quarterly unemployment rate for males from 6 to 5.1 percent and from 16.2 to 13.8 percent for females over the period under consideration. When adjusting for seasonality, the statistics also show a decline in the unemployment rate between the first quarter of 2008 and the fourth quarter of 2007.

The declining trend in un- employment is expected to continue into the year 2008. Unemployment rate for 2008 is estimated at 8 percent, down from 8.5 in 2007 and 9.1 percent in 2006.

As for consumer prices, the headline inflation rate for the financial year 2007-2008 remains high at 8.8 percent albeit falling from the double digit figure of 10.7 percent registered in 2007-2008. Much of the increase in prices is accounted for by rising prices of food, energy and petroleum products. Exclusive of these items, the (CORE 2) inflation rate as at June 2008 works out at 5.5 percent.

However, the recent pay increase granted in the public sector at the cost of Rs5.2 billion represent a significant injection of liquidity in the monetary system and could contribute to even higher consumer prices notwithstanding the likelihood of oil and food prices staying high in the medium term. In view of increased inflationary expectations, the Bank of Mauritius has consequently raised the key Repo rate from 8 percent to 8.5 percent.

Improving productivity and competitiveness is key

Despite the difficult international economic environment and the spectre of rising prices, it would appear that the growth and labour market performance of the Mauritian economy is holding up quite well. This is good news for Government whose major plans for alleviating poverty and improving living conditions rest upon a strong economy. But looking ahead, sustainable growth will depend crucially on improving productivity and competitiveness especially as the latest CSO statistics reveal some worrying facts about our eroding cost competitiveness. Growth in labour productivity is largely outstripped by the growth in remuneration such that Unit Labour Cost (ULC) has effectively risen by 4.5 percent on average annually for the past ten years. Furthermore, capital productivity has been falling while multifactor productivity which measures production efficiency and relates to factors like the quality of management, effective use of technology and training has only improved by 0.2 percent on average over the period 1997 to 2007.

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