NewsSouthern AfricaMauritius looks both East and West

Fri,01Aug2014

Posted on Wednesday, 09 January 2013 15:02

Mauritius looks both East and West

By Paul Adams in Port Louis

Port Louis shines brightly in all senses of the word/SAMUEL ZUDER/LAIF-REACompanies in the dominant economic sectors – tourism, agribusiness and textiles – need to find new markets outside of Europe. The country's planners are crafting a more conducive business environment that will allow Mauritius to profit from links to new trading partners in Africa and Asia.

 

Just as Mauritius often endures the cyclones that tear across the Indian Ocean with minimal damage, so the economy of this small island has withstood the aftershocks of the financial crisis on the other side of the world. The country's ability to adapt to changing external factors yet retain its stability will continue to be tested.

The government wants to reduce dependence on trade with Europe, encourage private sector growth and enhance the service sectors of an economy that has long been based on exporting goods.

The process is already underway. The government has overhauled key sectors over the past five years. The textile companies moved production to lower- cost countries and secured high-value export markets in the face of increased worldwide competition.

The dispute with India over the offshore financial sector could prove beneficial to Africa

Sugar producers have cut costs and production but shifted to added-value processing after the European Union (EU) scrapped a guaranteed price for the island's principal commodity. The restructuring was supported by a government stimulus package, backed by EU aid.

European impact

But now the other two pillars of the economy are at risk. A drop in visitors from Europe has hit the tourism industry, whilst the Indian government's concerns about abuse of a double taxation threaten to weaken the boom in offshore banking.

Gross domestic product growth – forecast at 3.5% this year – has been held back by the downturn in Europe, which, together with the United States, bought three-quarters of Mauritian ex- ports in 2011.

Europe was also the source of two-thirds of last year's tourist visitors and 60% of foreign direct investment.

There are other structural problems. Unemployment, officially around 8%, is more acute amongst the young population and a rising average age is leading towards a pension-funding crisis.

The external trade and fiscal deficits are widening this year as the effects of a state investment programme kick in.
Mauritius has got out of previous crises through the quick reactions of a resourceful private sector, dominated by a few large conglomerates, backed by government initiatives.

"Sugar is an indication of what we should be doing here," says Rundheersing Bheenick, governor of the Bank of Mauritius. "The sugar estates no longer produce just sugar; nowadays we talk of cane. The industry produces electricity and various other by-products are extracted."

Government's supply-side stimulus measures since 2008 have included low-interest bank loans for companies to save jobs, the Economic Restructuring and Competitiveness Programme and the National Resilience Fund for companies in financial difficulties.

There is consensus among private sector leaders and independent economists that the state must curb welfare spending and support for inefficient state industries.

The governing coalition led by Prime Minister Navin Ramgoolam's Parti Travailliste (PT) is sometimes fractious and has relied on a very small majority to survive since the abrupt exit last year of the Mouvement Socialiste Militant.

The smallish Parti Mauricien Social-Démocrate led by Xavier Luc Duval took its place. Like his predecessor Pravind Jugnauth, Duval is the son of a hero of the independence era and has become fin- ance minister and one of three deputy prime ministers.

"The tripartite alliance of government, opposition parties and trade unions is the main forum for economic policy making. Decisions are reached by dialogue," says Eric Ng Ping Cheun, an economist who has chaired two state-owned banks and now runs PluriConseil, a consultancy firm. "Often this works well, for example, with setting public sector wages.

However, it has not been as effective when it comes to some of the strategic policy decisions, such as pension reform or restructuring the parastatals," says Ng.

Ideological differences amongst the coalition partners are limited, and the Mauritian government has a tradition of reaching decisions by consensus.

But, with the economy in a fragile state, taking on powerful public sector companies is politically risky and the PT is backed by the majority Asian-origin population that dominates the civil service.

Members of the private sector say the need for reform is apparent, especially for the connectivity that is vital to the economy of a small remote island that seeks to turn itself into a service sector hub.

Leading bankers, information technology (IT) specialists and manufacturers argue that transport and telecommunications links need to be improved.

The IT sector made up 6.7% of gross domestic product in 2011, according to government statistics, and is one of the fastest growing, spurred on by international investment in business process outsourcing (BPO).

Critics say the low quality and high cost of internet and mobile phone services are holding back IT and the rest of the economy, largely because of the de facto monopoly of Mauritius Telecom.

"Mauritius can be an IT hub, but we need more competition, especially in internet service providers", says Vidia Mooneegan, the managing director of US-based Ceridian Global Workforce, which was among the first international firms to invest in software development and BPO in the island's gleaming new Cyber City IT hub.

Low-cost airlines

Similarly, the tourism industry, which is trying to make up the shortfall from Europe by attracting visitors from China and India, relies on air links. Operators in the sector are critical of the privileged role of Air Mauritius.

Hotel companies, losing out to rivals in the Maldives and Seychelles, say there are not enough flights to meet capacity and they want the government to allow budget air operators to have greater access to the island.

The government appears confident that the strengths of the economy will prevail. Its skilled workforce, political stability, strong rule of law, relatively developed infrastructure and close ties with Europe and India have already led to its success as an offshore financial centre, which has channelled nearly half of India's foreign direct investment in the past decade and become a favoured jurisdiction for global banks.

These strengths are underlined by the World Bank's 'Doing Business' survey which ranks Mauritius first in Africa and 23rd worldwide out of 183 countries.

Transparency International and the Mo Ibrahim Index of African Governance also place Mauritius at the top of their rankings in Africa. Ratings agency Moody's upgraded the country's credit rating to Baa1 in June.

The Indian government argues that the bilateral double taxation avoidance agreement has been abused by Indian companies that invest nothing in Mauritius but use it merely to avoid tax at home. This is causing concern among some offshore financiers.

Local operators in the offshore sector and finance officials see the Indian claims as unjust. Discussions on safeguards are continuing, and the Indian Prime Minister Manmohan Singh's government is preparing to postpone substantial tax reforms for at least another three years.

Others say the dispute will hasten the development of the next phase of the Mauritius offshore financial sector as a gateway to Africa, even between African countries that lack trade ties or trusted legal and tax systems.

"The current shake-up will do Mauritius a lot of good," says a partner in a leading accountancy firm. "It will create more onshore investment by international companies using this as a base, and it will force the offshore operators to open up new channels to Africa."

The country's banks, sugar estates, textile manufacturers and hotel groups have expanded their operations in Africa. Conglomerates such as CIEL and Groupe Mon Loisir have brought know-how and finance to neighbouring Indian Ocean islands and gradually to east and southern Africa during the past decade.

Economic diplomacy is not far behind. Mauritius has already signed 36 double taxation avoidance agreements worldwide, including 13 with African countries.

Membership in the Southern African Development Community and the Common Market for Eastern and Southern African trading blocks provides Mauritius with the route to closer economic ties on the continent●



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