11 June 2019

Mauritius: Meeting Social Aspirations in a Challenging Economic Environment

analysis

Embracing a Brighter Future Mauritius Budget 2019 - 2020 10 June 2019

The Finance Minister, Honourable Pravind Kumar JUGNAUTH has delivered the fifth and last Budget Speech of the present Government, with the overall objective of continuing the development and transformation of Mauritius. He has pursued the approach of improving economic and social justice in the country, whilst simultaneously laying out measures aiming at further modernisation of physical and regulatory infrastructures. This particular budget speech is under scrutiny by all segments of the economy and society, given forthcoming general elections in Mauritius.

This budget is taking place in a global environment characterised by geopolitical tensions and by trade wars between leading economies, notably US and China, with potential rounds of retaliatory measures ahead. G-20 Finance Chiefs and the IMF already acknowledge that the prevailing deepening trade tensions pose a threat to the world economy. Leading Central Bankers have over the past week, been announcing a possible need to reverse the recent policy orientation through re-implementation of interest rate reduction and of Quantitative Easing. The ongoing trade wars may even lead to currency wars marked by competitive depreciations. Unless skilfully and diligently managed, these disruptions have potentially damaging implications for the economic and financial stability of countries, especially for small open economies like Mauritius, which are heavily reliant on international trade for boosting growth and living standards.

While inflation rate and unemployment rate have been lately falling, the domestic economic environment continues to be challenging and characterised by sub-par growth of below 4 percent per annum over the last decade, requiring structural solutions. The manufacturing export sector has been dwindling while the global business sector can no longer rely on tax treaties. Technological disruption implies that "Business as Usual" is no more an option for the financial sector. The number of Old Age Dependents per Thousand of Working Age workers has increased, from 160 in 2010 to 240 in 2018, and is projected to rise further - this has implications for pension management and sustainability. Aggregate Expenditure has been tilting towards Consumption, away from Investment and Exports. Total Investment to GDP ratio has fallen from 23 percent (2009 - 2013) to 18 percent (2014 - 2019), while Total Consumption to GDP has risen from 80 percent in 2006 to 90 percent in 2018. Public Sector Debt to GDP has increased, from 52 percent in 2008 to 57 percent in 2013 and 63 percent in 2018, and Government plans to reduce the debt to 60 percent before 2021 by using part of the undistributed surplus of the Bank of Mauritius. The budget deficit, which has evolved in a stable range of 3 percent - 3.5 percent of GDP since 2013, is estimated to maintain course at 3.2 percent for financial year 2019/2020.

The budget aims to address the above challenges through ten avenues, including strengthening pillars of economic growth, expanding the economic space, building infrastructure, sound public finance and sustainable debt. Innovation, Business Facilitation and Democratisation are being encouraged across the entire economic spectrum, from agriculture to financial sector through education, health, energy, ocean economy and SME sectors. Airport and seaport infrastructure, road and water infrastructure, market access for Mauritian exports, paperless administration, licensing of innovative financial services and public fund management are enhanced in order to promote overall economic efficiency and inclusive development. Multilateral African banks will provide funding for viable projects on the continent by Mauritian enterprises

Some of the fiscal measures include new five-year tax holidays for E-commerce platforms and Peer-to-Peer Lending operators, and an option for SMEs to pay a final income tax of 1 percent of their turnover. Taxation of banks is being finetuned, and banks will also be eligible to reduced tax rate of 5 percent, provided they grant at least 5 percent of new facilities to SMEs, targeted sectors or operators in Africa or Asia. The tax legislation will be amended to introduce rules on controlled foreign companies (CFC).

This budget places considerable emphasis on social aspects, including alleviation of poverty, promoting the health of Mauritians, raising the purchasing power of the population, widening opportunities for SMEs, enhancing gender equality in corporate decision-making and assistance to senior citizens. However, these aspirations as well as the ambitions to graduate to a high-income economy are dependent on the achievement of strong economic growth in a challenging world.

Mauritius

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