Mauritius: Turning Point

Will the Covid-19 pandemic erase Mauritius’ recent gains?

This past July, Mauritius joined the ranks of the world’s high-income nations, according to the World Bank’s classification, based on its gross national income per capita of $12,740 in 2019, a 3.5% increase over 2018.

It is only the second country in Africa to achieve that status, after Seychelles. “This reflects Mauritius’ decade of successful economic development,” says Erik von Uexküll, World Bank country representative for Mauritius.

The ranking is a much-needed pat on the back at a time when the country is confronted by Covid-19 impacts. With fewer than 500 infections and 10 deaths, the island nation felt more of an indirect than a direct one. Covid-19 crippled tourism: In April and May alone, tourist industry foreign-exchange losses were estimated at $300 million, Bank of Mauritius Governor Harvesh Seegolam announced at the end of May. The pandemic also depressed manufacturing and agricultural exports, exacerbating a grade deficit that was already nearly 22% of GDP in 2019, according to Deloitte.

Events of 2020, with the Covid-19 pandemic playing a central role, have jolted the country in a manner never witnessed in its more than five decades of independence. “For Mauritius, the honeymoon is over,” says Claude Baissac, CEO of consultancy firm Eunomix. “The country must rethink its resilience strategy.”

The government has been proactive in trying to contain widespread economic damage. “The fallout on our economy is without comparison,” Finance Minister Renganaden Padayachy acknowledged in his maiden budget speech in June.

Government Takes Action

Anchored on the Investment and Economic Recovery Plan to “revive the traditional sectors of the economy and facilitate the emergence of new areas of activity,” the government unveiled in June a $2.5 billion stimulus package to support housing, infrastructure projects, food and pharmaceutical production, the small and mexium-size businesses and households.

The aim is to ensure attraction of foreign direct investment (FDI). Registration of new offshore firms fell by 40% in the second quarter, the World Bank confirms. Still, FDI, a notoriously volatile metric, seems relatively stable. According to Unctad’s latest World Investment Report, inbound FDI in 2019 rose to $472 million, 27% over 2018, and on par with 2017.

Having positioned itself as a financial hub, Mauritius is making particular efforts to draw foreign capital to the financial sector, including a recommendation that the Bank of Mauritius introduce new frameworks for digital banking, private banking and wealth management.

Mauritius is looking beyond its traditional sectors, like financial services and real estate, to develop emerging industries such as in the “blue economy” of marine products and services, as well as technology and other knowledge-intensive industries. “FDI is a promising pathway for the country to upgrade technologically and develop competitive new industries,” observes Uexküll.

The blue economy has particularly emerged as crucial. It currently accounts for 10.5% of GDP and 20,000 direct jobs, and the government wants to double its contribution in the medium term. It has put in place an elaborate strategy anchored on new frontiers like aquaculture, maritime services, marine biotechnology and oil and gas exploration.

However, a massive oil spill in July points to the challenges. Notably, Mauritius’ coastline is the location of most of the country’s critical infrastructure, housing, tourist attractions and a high percentage of it’s economy. With about 20% of the population residing in coastal areas, the spill posed significant threats to lives as well as livelihoods.

Threats to the blue economy are exacerbated by natural disasters that climate change and sea level rise have intensified. Lying within the Southwest Indian Ocean cyclone basin, the country is highly vulnerable. The World Bank estimates that on average, Mauritius loses 0.8% of GDP annually to tropical storms and flooding.

Looking Long Term

Undoubtedly, the pandemic has exposed the country’s underbelly. In 2019, the economy posted growth of 3.6%. In June, the government was forecasting a contraction of 11% for 2020, and noting it “the worst GDP contraction ever for our country.” In October, the forecast was revised down to -13%.

In fact, the World Bank’s latest Macro Poverty Outlook report on Mauritius paints a bleak picture particularly on the aspect of social capital. In a country with a population of about 1.3 million, “over 50,000 youths aged 16 to 29 are neither in education nor in employment.” Few have tertiary education, while women’s participation in the labor market is dismal. The unemployment rate was at a 10-year low of 6.7% in 2019 but could hit double digits this year. The poverty rate is projected to increase to 13% in 2020, up from 12.7% a year ago.

Uexküll notes a handful of “structural issues that predate Covid-19 but have been exacerbated by the crisis”—an economy increasingly driven by consumption rather than investment, declining external competitiveness, high unemployment accompanied by skill and education shortfalls, and rising public debt. Under these circumstances, he believes, Mauritius will face a challenge managing its transition to a knowledge-based economy.

With declining revenues and increasing expenditure in response to the pandemic, public finances have come under significant strain. Since 2013, the budget deficit has stabilized in the range of 3% to 3.5% of GDP. It is now projected to mushroom to 13.6% this financial year. By September, Mauritius had amassed $9.2 billion in gross public debt—85.7% of GDP. Since January, the Mauritian rupee depreciated by approximately 10% against the dollar, despite Bank of Mauritius interventions of close to 3% of GDP.

The current state of Mauritius does not inspire confidence. “There are growing concerns of lack of vision on what will drive long-term growth,” observes Baissac. He says that the oligarchic concentration of political power has given rise to corruption and growing dissatisfaction, even from foreign partners and investors. “Unless they change tack,” he adds, “the next few years will demonstrate how ineffective and unimaginative the political elite has become.”

Despite going through a challenging period, the way Mauritius comes out of the current crisis will be significant in shaping the future. Considering the country has demonstrated resilience in the past, Mauritius could be on the cusp of another wave of economic success. This, however, depends largely on the political class. “Successive Mauritius governments have always been able to adapt rapidly to shocks,” concludes Baissac. “This is one of the key reasons for the country’s success.”