9 June 2017

Mauritius: Deloitte - Addressing Structural Challenges to Drive Growth

The Finance Minister delivered his Budget speech in the context of considerable hopes, challenges and uncertainties. The main challenges addressed by the budget include achieving higher growth, increasing investment in infrastructure, improving quality of life, building a new social paradigm and consolidating macroeconomic fundamentals.

There is widespread hope that the Mauritian economy would exceed the psychological threshold of 4 percent economic growth, as a prelude to heightened prosperity. The latest tendency is encouraging, with growth picking up from 3.2 percent in 2015/2016 to an estimated 3.9 percent in 2016/2017 and projected at 4.1 percent in 2017/2018. However, to break away from subdued growth experienced over recent years, policies and strategies have been announced to boost investment and exports as well as enhance innovation, notably the promotion of Mauritius as a digital economy through Fin Tech, Blockchain and 3-D Printing.

Exports increased consistently from MUR69.6B in 2010 to a peak of MUR94.8B in 2014, thereafter falling to MUR 93.3B in 2015 and MUR83.8B in 2016. The budget measures and incentives in support of the export industry, including tax reduction from 15 percent to 3 percent on profits derived from exportation of goods, should contribute to reverse the recent decline in export sector earnings in an attempt to improve the widening trade deficit. However, this fiscal incentive should also be accompanied by measures to raise productivity. This is also a step towards harmonisation of taxation for domestic exporters and global business companies (GBC1).

Other key corporate tax measures include incentives in terms of accelerated capital allowances and double deduction for qualifying research and development expenditure, 8-year income tax holiday for innovation-driven companies of pharmaceutical and high tech product manufacturers. The success of these incentives will also depend upon other factors including availability of skilled resources. The negative income tax for low-income employees that has been accompanied by a new solidarity levy of 5 percent for high-income earners is a step towards mitigating income inequality.

Investment as a percentage of GDP has been declining over the last five years and needs urgent attention. Total investment rate declined from 17.4 percent in 2015 to 17.2 percent in 2016, driven by a reduction in public sector investment, on account of bottlenecks in implementation. Measures to monitor implementation, from planning to completion of major projects, should be able to result in higher public investment.

The budget deficit for 2016/2017 is estimated at 3.5 percent of GDP, thus at an acceptable leve l. Public sector debt, as per international definition, is estimated at 66.1 percent of GDP at June 2017 and is expected at 63 percent by June 2018. However, the announced aim of bringing it further down to below 60 percent is conditional upon a sustained acceleration in economic growth in coming years. Should growth not pick up and significant contingent debt items materialise, the risk of public sector debt shooting up further would be real and that would consequently trigger considerable challenges for policymakers.

This budget indeed contains a wide range of packages and incentives addressed to key productive sectors, including agro-industry, bio-farming, ocean economy, tourism, financial services, manufacturing and the digital economy. Diligent implementation of the enunciated measures aiming to boost investment and exports, enhance productivity and efficiency as well as encourage smart technology and practices would be indispensable for Mauritius to graduate to a higher growth trajectory. The success of these measures would also require the active participation of the private sector.

Mauritius

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