Posted on Tuesday, 30 September 2014 15:27

Mauritius: Missing the sweet spot

By Jana Marais in Port Louis

Tourism plays a crucial role in the economy with a drive towards wooing high-net-worth visitors. Photo©Holger Leue/CorbisDespite government hopes of Mauritius becoming a high-income country by the end of the decade, analysts fear the downturn in the key sugar and tourism industries, sparked by the European economic crisis, mean it will miss its 2020 target. Meanwhile, the financial sector remains under pressure due to concerns over the future of a crucial tax treaty.

The year 2020 looms closer, with Mauritius's stated ambition of becoming a high-income country by this date looking increasingly out of reach.

As Mauritius transitions from an economy dependent almost exclusively on agriculture in the 1960s to one with strong textiles, finance and tourism sectors, it is still on course to be the richest non-resource-dependent country in Africa by 2025, according to estimates from local analysts.

Today, large Indian companies are investing in Africa, using Mauritius to set up a structure to invest in the continent

However, with doubts over the role Mauritius's financial sector will play in India, the country's African ties are becoming ever more important. Politicians and businessmen say there is much to be done to address challenges from a changing international policy environment and to strengthen the infrastructure and human resources bases of Mauritius's long-term economic growth.

"If you look back over the medium term, the Mauritian economy has performed very well. But the feeling now is that all the low-hanging fruit has been picked. We've done quite a bit of business facilitation and so on. There are now difficult issues that need to be tackled," Xavier-Luc Duval, the leader of the Mauritian Social Democratic Party, who resigned as finance minister in June, tells The Africa Report.

The government organised a wide-ranging debate on its Vision 2020 programme back in 1997, with working groups on agriculture, tourism, industry, science and employment, among other topics. With just a little more than five years to prepare a new vision for the island's development, policy makers are thinking about what areas of the economy could raise per capita gross domestic product (GDP) from $9,300 in 2013 to $12,746, the current World Bank high-income threshold.

Off target

In July financial services company MCB Group echoed International Monetary Fund (IMF) analysis that the Mauritian economy is growing too slowly to meet the 2020 target.

The IMF predicts real GDP growth of 3.7% this year and says that the economy would need to grow by a rate of about 5% per year for the country to reach high-income status by 2020. At current rates of growth, MCB says that Mauritius will become a high-income country by 2025 if growth maintains an average of 3.3%.

In 2013, Mauritius ranked 20th out of 189 countries in the World Bank's Doing Business ranking, making it the top-ranking African economy. Nonetheless, MCB's researchers warn that the government has not implemented reforms rapidly enough and that public investment has been slow to materialise.

While many of the country's institutions, including its judiciary and Board of Investment, are strong, reform is needed to address shortcomings at others, Duval says. "I'm talking about the fight against poverty, the National Empowerment Foundation. I'm talking about having water all around the clock, about the Central Electricity Board, about increasing productivity in the civil sector. There are many short- comings that need to be addressed that will push us through to become a high-income country," he explains.

While national elections, due by 5 May 2015, may lead to a change in power, economic policy is not expected to change much, says MCB Group's chief strategy officer Gilbert Gnany. "All the main parties have more or less the same economic policies. Even when you see a change in coalition partners, there is no disruption in terms of economic policy. There are minor differences, for example on social spending, but no one is challenging the 15% tax rate. No one is challenging the 0% on dividends or capital gains. It's a given," he explains.

A July IMF report says that growth rates could rise "with strong pro-active policies including improving investment and savings rates, improving the efficiency of social spending and public enterprise reforms, investment in education and education reforms, labour market reforms and further measures to reduce bottlenecks and increase productivity."

While a coalition that involves some of the four main parties is likely to win the next national elections, a new party will face a crucial first test in shifting the political debate. Roshni Mooneeram, an academic who officially launched the political party Ensam in July, says a focus on general economic indicators fails to capture the unhappiness in the country.

"We have seen a number of examples of unsustainable and even destructive sectoral development, for example the IRS [integrated resort schemes] with its gated developments, tourist enclaves and the impact these have on small businesses such as restaurants, which are closing in the north. When will we accept that a large portion of our educated youth wish to leave Mauritius to never come back, the growing population of old people who have to queue for bad health care, that the cost of living has become prohibit- ive and that we still have 8,000 families living under the poverty line?" she asks.

Finding a niche

Each of the country's major economic sectors has its own challenges. With a drastic drop in the portion of investment flows to India being routed through Mauritius – historically a major driver of its financial sector – the country is look- ing to Africa for new business.

However, competition is strong. South Africa's major banks have experience and a major footprint on the rest of the continent, while Morocco, with a traditional focus on Francophone Africa, is extending its trade and commercial interests and trying to lure stock exchange listings from south of the Sahara.

MCB's Gnany says the Mauritian financial sector can be competitive in a few niche areas, for example by using its relationships and India's knowledge of its legal and tax system to capture a part of investment flows between Asia and Africa.

"We're so small, we can't do everything. Today, large Indian companies are investing in Africa, using Mauritius to set up a structure to invest in the continent. They're used to it. It was the other way around before, with money flowing from elsewhere via Mauritius into India," Gnany explains.

A double-taxation avoidance agreement (DTAA) with India, signed in 1983, played a key role in developing the Mauritian financial sector. It encouraged investors to route money through the Indian Ocean island to benefit from its low tax environment, where foreign companies pay an effective 3% tax rate on profits and 0% on dividends and capital gains.

However, the treaty is being renegotiated amid concerns in Delhi that In- dian companies are using Mauritius for 'round-tripping' of funds. This involves Indian companies moving money through Mauritius in order to avoid paying capital gains tax in India. Talks to renegotiate some of the terms of the DTAA are ongoing, and the Mauritian au- thorities maintain that there are strict regulations in place to ensure transparency and prevent abuse by shell companies.

While bankers and government officials have downplayed the risk to the Mauritian economy should the deal be cancelled, Prime Minister Navin Ramgoolam has been trying to woo Delhi. He attended the swearing-in ceremony of Prime Minister Narendra Modi in May and met with him to discuss the treaty.

FDI foothold

"I don't think it [negotiations regarding the treaty] is a major issue, but it will be good to have certainty sooner rather than later. Uncertainty isn't good for investors," Gnany says. With or without the treaty, Mauritius is already losing traction as the preferred channel for India-destined investments.

Singapore overtook Mauritius last year as the biggest source of foreign direct investment into India, accounting for nearly a quarter of India's total, according to data from India's Department of Industrial Policy and Promotion. Flows through Singapore increased by 160% to $6bn, while those from Mauritius nearly halved to $4.9bn, down from $9.5bn the previous year.

Over the past few years, the finance sector has turned to Africa, and that pivot has already shown itself to be successful. "If you look at our proximity to the continent, the fact that we're bilingual and the ease of doing business here, it makes us an ideal place to launch a venture into Africa," former finance minister Duval says.

Jacques Nel, an economist at NKC Independent Economists, agrees: "With a substantial network of investment protection treaties and double-taxation avoidance agreements, and a highly sophisticated banking system in place, Mauritius is in a prime position to cement its role as an investment hub into Africa." Statistics from the Mauritian Financial Services Commission show Africa is the main recipient of investment flows channelled through Mauritius, with 54.4% of all flows last year targeting the continent, up from 40% in 2010.

In order to encourage Mauritian investment and closer trade ties with Africa, the government announced subsidies for freight costs and credit guarantee insurance for exports in the 2014 budget. It also announced the establishment of the Rs500m ($16m) Africa Fund. Over the next five years, it will provide equity financing for companies investing in African projects.

Tourism lynchpin

Enterprise Mauritius, which is tasked with finding markets for the country's exports, is targeting a number of African countries in order to reduce the country's dependence on Europe. The country's banks, textile and tourism firms are slowly expanding their footprints in countries like Bangladesh, Kenya and Zimbabwe.

Closer collaboration with Madagascar, where investment has been hampered by a five-year political crisis, offers growth and investment opportunities for both countries. A model similar to the 'growth triangle' that Singapore established with Indonesia and Malaysia in the late 1980s - where Singapore brought management skills and technology to the table and Indonesia's Riau Islands and the Malaysian state Johore offered land and low-cost labour - may also help attract major investments and job creation in both countries.

The Mauritian tourism sector, a key pillar of the economy, recorded lower growth rates than those recorded in other Indian Ocean islands, including the Seychelles, Maldives and Sri Lanka. The downturn in Europe has reduced arrivals from that region, but marketing efforts have led to an uptick in visitors from China. As a result, the government reported a 2.4% rise in tourism revenue for the first half of this year to $735m.

The DTAA is not the only international agreement that could negatively impact business in Mauritius. Ahead of the United States-Africa summit in Washington DC in August, textile producers and other members of the Mauritius Export Association expressed concerns that they could soon be disqualified from duty-free benefits of the African Growth and Opportunity Act because of the level of the country's development.

With low sugar prices due to oversupply in Europe, Mauritian companies are looking elsewhere for growth. Despite reporting a loss of $7.7m for the first half of the year, in July Omnicane announced its intention to invest $250m in a sugar-cane plantation in Ghana that is set to yield 100,000tn per annum. Terra Mauricia produced similar results in the first half of 2014 and recorded a loss of $5.1m.

The manufacturing sector has faced its own challenges. Despite some progress, the Bank of Mauritius reported that the sector accounted for 23.6% of GDP in 1990 and fell to 16.7% in 2012.

Last year, when talking about the need to look beyond 2020, central bank governor Rundheersing Bheenick called for a more innovative private sector. To support research and development capacity, the government announced its backing for the creation of the International Institute of Technology Research Academy in July. The Mauritius Research Council and the Indian Institute of Technology will support the new institute.

Ocean economy

The government is focused on building what it calls the 'ocean economy,' which it hopes will contribute 17% to GDP by 2020, up from 10.8% in 2012. "In a very short period of time, we've been able to get those working in port development, tourism and fisheries to come together so we can adopt an integrated approach towards all ocean-related activities," says Milan Meetarbhan, ambassador of Mauritius to the United Nations.

The University of Mauritius has already established a faculty of ocean studies to help build capacity, and laws that will enable the government to issue oil and gas exploration licences should be in place by next year.

"For small islands, the ocean economy is an opportunity to expand economic space. We have very limited land, and while there are continuous efforts to diversify the economy, there is only so much we can do [...] To really take advantage of this, we mustn't just have the right economic policies and laws in place, but also make sure we have the right policies with respect to conservation," Meetarbhan concludes.

Dev Chamroo, chief executive of Enterprise Mauritius, is optimistic: "We thought sugar was going to die out. It emerged into a cane industry. We moved from exporting raw sugar to producing two of the world's best rums. If you look at all the initiatives that government has initiated since independence - none of them have fallen or died." ●

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