Mauritius: Africa’s Offshore Haven

Mauritius is betting that political stability and free-market reforms will vault it into the ranks of high-income nations. But first, it needs more foreign investment.

Since he entered office two years ago, Mauritius Prime Minister Pravind Kumar Jugnauth had shouldered the derisive tag of “Papa-piti.” In the tiny island nation of 1.3 million people, this means “from father to son.” For Jugnauth, it was a constant reminder by political opponents that his rule was inherited from his father, Anerood Jugnauth, Mauritius’s longest-serving head of government.

On November 7, Jugnauth succeeded in dropping the tag in a hotly contested general election. His party, the Militant Socialist Movement, comfortably won a parliamentary majority, securing him a five-year term and giving him the authority to steer the nation without the hovering shadow of his father. “I have received a clear mandate,” he told supporters with satisfaction after the electoral commission announced the results.

The election also cemented Mauritius’s position as a haven of political stability and democratic process compared with its neighbors in Sub-Saharan Africa. “Mauritius is a gem of the Indian Ocean,” says Gavin Butchart, operations director at Brent Wealth Management (Mauritius), arguing that the country’s next focus must be on economic development.

Mauritius wants to join the league of high-income countries; already, its per-capita income of $10,500 is way ahead of the region’s average of $4,000.

“We have made it our resolve to usher in a new era of development,” Jugnauth said after unveiling his government’s 2019-20 budget in June.

Signs of Transformation

Signs of transformation are visible. Gross domestic product (GDP) is projected to grow at 3.9% in 2019 and 4.1% in 2020. Foreign direct investment (FDI) has dropped; according to Bank of Mauritius (BoM), the island’s central bank, inflows stood at $461.5 million in 2018, down from $564.4 million in 2017. But the government anticipates a rebound after rising seven places to 13th in the World Bank’s Ease of Doing Business 2020 ranking, against an overall “weak performance” across Sub-Saharan Africa.

Mauritius also moved past Botswana into second position in the Absa Africa Financial Markets Index, which measures the continent’s most advanced financial markets. Its score rose to 75 from 62 in 2018, propelled by a sizeable pool of investible pension assets and a strong legal framework.

“Mauritius understands that being a global financial center is key to attracting investments,” says Jeff Gable, head of research at Absa. In July, the government enacted the Business Facilitation Act, amending 26 legislations designed to spur private investments. Among other things, the act expedites new business launches, eliminates unnecessary license and permit requirements, and streamlines customs processes.

The BoM and local pension schemes are leading efforts to deepen the country’s publicly traded markets. In the year ending last June, BoM bonds were valued at $268 million, up from $211 million a year ago. This raised the total value of bonds listed on the Stock Exchange of Mauritius by 27%. Mauritius leads other African markets with $4,331 per capita in pension assets.

The government is particularly keen on revitalizing manufacturing and tourism, developing the ocean economy, increasing output of renewable energy, enhancing the deployment and adoption of modern technology and building smart cities.

Mauritius also wants to capitalize on the African Continental Free Trade Area (AfCFTA)—which aims to provide incentives for foreign investors targeting the continent’s market of 1.2 billion consumers—by presenting the island as a manufacturing and financial hub. Mauritius also sees AfCFTA as a vehicle for deepening ties with mainland Africa, particularly for its banks.

“Mauritius has successfully tapped into new sectors for sustainable growth,” states SBM Bank, one of the biggest banks in the country. This has attracted a new breed of investors. In 2018, France was the biggest source of direct investment in the island with inflows amounting to $74.2 million, followed by South Africa at $58.4 million and China with $48.1 million. The UK, with $25.3 million, is also increasing its inflows.

The government concluded that Mauritius must overhaul its tax regime and shed the “tax haven” tag, which became an embarrassment following the Mauritius Leaks exposé by the International Consortium of Investigative Journalists in July. The government took action, revising rules around corporate and personal tax rates, indirect taxes and tax administration. For example, an income-tax holiday now supports companies setting up e-commerce platforms and peer-to-peer lending operators, and rules are aligned with global best practices, including attribution of income according to the “arm’s length” principle. Impacts of the reforms have been instantaneous. The European Union has removed Mauritius from its blacklist of tax havens, and the Organization for Economic Co-operation and Development has stated that Mauritius’s tax regime doesn’t permit or encourage harmful practices.

“Mauritius is not a tax haven but a competitive and attractive cross-border investment platform,” according to SBM. Conscious that the global regulatory environment is growing more stringent, it has committed to adopting best practices and global standards, particularly as the International Monetary Fund (IMF) named Mauritius among 10 countries holding 40% of global phantom FDIs.

Gray Areas

While Mauritius remains a silver lining in a turbulent region, shades of gray abound. In particular, it often has “problems with corruption and perceived poor behavior by public officials,” says Michael Jones, Africa country risk analyst at Fitch Solutions.

Last year, President Ameenah Gurib-Fakim resigned after being charged with misusing charity funds for person gain. A year earlier, Attorney General Ravi Yerrigadoo resigned over allegations of money laundering. “Mauritius has registered an increase in public perceptions of corruption,” says Jones. Its score in Transparency International’s Corruption Perception Index improved to 51 in 2018, from 53 in 2015.

Public debt, too, is on the rise, the budget deficit is expanding, the current account deficit has widened and the country remains exposed to risks including vulnerability to external shocks and natural disasters such as cyclones and floods.

At the end of June, gross public debt stood at $8.5 billion, accounting for 64.6% of GDP. While still at sustainable levels, the government has admitted that achieving targets of 60% of GDP by the end of the 2020-21 fiscal year isn’t feasible, yet it holds out hope for 2022-23. Still, IMF warns that lowering public debt is critical to safeguarding macroeconomic stability and creating room to respond to shocks.

Behind the debt surge is an increase in government borrowing to fund infrastructure projects and a continuing decline in exports—mainly of textiles and agricultural products—which is adversely affecting the balance of payments. Last year, the current account deficit soared to 6.2% of GDP from 5.6% in 2017. For the 2019-20 fiscal year, the deficit is forecast to hit 7%. Some economists predict that at current rates, the deficit could hit 10% of GDP over the next five years.

Given that Mauritius is an open economy with strong foreign ties, susceptibility to external shocks looms large. Disputes with the UK and the US over the Chagos Islands and Diego Garcia remain unresolved. In recent months, the country has deepened security ties with India and signed Africa’s first free trade deal with China while also joining Beijing’s maritime silk road initiative

The trade agreement gives some 8,547 products access to the Chinese market duty-free. While this might not have significant impacts in the immediate future, there will be long-term benefits, Jones says: “Deepening economic and financial ties with China will keep the country robust.”

Foreign exposure at a time when the global economy is under pressure, particularly from trade wars, poses risks. In particular, a tightening of global financial conditions could reduce Mauritius’s financial inflows and affect exports. Clearly, however, the government is betting that greater openness, and closer economic ties with its neighbors, is the island country’s best chance of entering the ranks of high-income nations.