Economy: Urgent need to broaden the base

By David White

FINANCIAL TIMES, London. Published: March 14 2006

The combination is like several cyclones moving in at the same time. The main export industry has seen a 30 per cent reduction in volume over the last four years while, over the next four years, the mainstay commodity faces an enforced 36 per cent cut in its selling price.

Mauritius's island economy is being buffeted from all sides. Arguably the African former colony that has made best use of protected trade access, its clothing factories have been exposed to frontal competition from China, India and other Asian mass producers, and its sugar growers face a sudden loss of income from their captive European market.

The problems of these two sectors, on which Mauritius has come to rely heavily for both employment and foreign exchange, are compounded by the sharply increased cost of imported oil and rising freight charges. The government’s capacity for limiting the effects of these simultaneous setbacks is limited since it is already struggling to control a large budget deficit.

“We do not have the resources of our own to meet these challenges because they’re happening at the same time,” warns Rama Sithanen, finance and economic planning minister.

Mauritius has, he says, started exploring prospects for concessional finance to take it through the next few years.  As a middle-income country, with per capita gross domestic product close to $5,000 a year, 20 times that of the poorest African countries, it does not usually qualify for soft loans.  But now it needs big injections of finance without overburdening itself with more costly debt.

Investment requirements alone for adapting Mauritius’s sugar industry, the historic foundation of its economy, are put at €650m up to 2015. With support for revenue and freight costs, the figure comes to more than €1bn. The European Commission’s proposal for offsetting the impact of sugar market reform, yet to be finally decided, would give Mauritius less than €200m.

Mr Sithanen, who is also deputy prime minister, describes the proposals as “largely insufficient”. The government, he says, has started discussions with the World Bank and the African Development Bank, and is hoping for support from the European Development Fund and from proposed aid-for-trade facilities.  It is also looking for direct foreign investment to help plug the financing gap and will need to rely more heavily on tourist earnings until the sugar and textile sectors are completely restructured.

“We are convinced that we will remain competitive in these two sectors, but the architecture will be different,” Mr Sithanen says.

Mauritius’s own ability to finance the changes is limited, with both the government and the corporate sugar sector already heavily indebted. Public sector debt, mostly domestic, accounts for two thirds of gross domestic product.  The government aims to bring this proportion down.  The cost of debt servicing now exceeds its spending on education or health.

Following a warning in January by the International Monetary Fund of a deteriorating budget deficit if no corrective measures were taken, the government has set strict guidelines for freezing expenditure in real terms.  It aims, says Mr Sithanen, to give more priority to capital spending, develop projects with private partners, and plug leakages in the tax system.  An austere budget is in prospect for next financial year starting in July in an effort to hold the government deficit at 5.5 per cent of GDP. Economic analysts say, however, that if state companies are included, the figure is likely to rise above 6 per cent.

Countering a warning from the IMF in January of a deteriorating deficit combined with subdued growth over the next two years, Mr Sithanen says Mauritius is placed to regain a robust expansion rate.

The government has come forward with a series of proposals for broadening the economic base, in the hope that at least some of them – ranging from information technology to the commercial exploitation of ocean water, and from seafood to medical services – will pay off.

Eric Ng Ping Cheun, director of PluriConseil, a Mauritius consultancy, says he is “quite optimistic” in spite of a fall in estimated growth to 3 per cent last year.  He believes the country can maintain a rhythm of about 5 per cent growth a year, after an average of about 4 per cent in the last five years.

“The 2006-2010 period cannot be worse than the 2001-2005 period,” he says, when the sharp contraction of the textile industry caused a negative multiplier effect throughout the economy.  He expects textiles to return to positive growth from next year as efficiency gains begin to show, and tourism to boom as more flights become available.

His big concern, however, is over foreign exchange.  The current account of the balance of payments has been in the red since 2004. The shortfall widened to 5.8 per cent of GDP last year, putting pressure on official foreign exchange reserves as higher import costs coincided with falling export earnings.

The central bank, Mr Ng says, has relied on persuasion rather than intervention to prevent a fall in the value of the rupee.  But he believes this policy will prove unsustainable and the currency will have to be allowed to depreciate.

The unemployment rate stands at about 10 per cent, up from less than 7 per cent five years ago.  The private sector is pressing for greater labour deregulation.

Gérard Garrioch, president of the Mauritius Employer’s Federation, which focuses on training and industrial relations, calls for “a complete revamping” of labour laws and wage bargaining mechanisms to increase flexibility.

“We have a fairly open economy on paper,” he says. “In reality, it’s not as open as it seems.”