Mauritius: Soaring prices spark economic anxiety

By Kervin Victor
Posted on Thursday, 14 July 2022 15:37

A vendor sells chillies at a food market in Port Louis June 26, 2008. Ways to improve the continent's food output and deal with soaring world commodity prices will be discussed at the African Development Bank conference in Tunis on Thursday. REUTERS/Ed Harris (MAURITIUS)

Like many island nations, Mauritius imports more than it exports. With the Covid-19 pandemic and the war in Ukraine disrupting the supply side, the country is juggling the impacts of soaring inflation and an abrupt depreciation of its currency, which are squeezing household budgets and the economy.

Due to the country’s limited size – covering only 2,040km2 – and lack of large-scale economies, Mauritius imports many of its essential food requirements. Indeed, its overall self-sufficiency ratio is less than 30%.

According to Statistics Mauritius, total imports in all sectors amounted to Rs215bn ($5bn) in 2021, representing an increase of 29.8% on 2020’s levels. The trade deficit was Rs133bn in 2021, around 39.4% higher than in 2020. The deficit is forecast to reach a record Rs160bn for 2022.

For many Mauritians, a major concern remains the rising prices of commodities, now at a level not seen for a long time. The year-on-year inflation rate for the 12 months ending March 2022 was 10.7%, compared to 1% for the corresponding period in 2021.

Unprecedented inflation

“Price increases in Mauritius are something we haven’t seen for many years, at least not for the past 15 years,” says Jayen Chellum, secretary general of the Consumer Association of Mauritius (ACIM). “The rise in the rate of inflation is like an indirect tax on consumers,” he says. “According to the Statistics Mauritius household budget survey, 75% of Mauritian household expenditure is on food products. This is a very big problem for a category of the population.”

Citizens blame the government for allowing the national currency, the rupee, to depreciate drastically. According to the Bank of Mauritius, the Mauritian rupee depreciated by 7.6% in 2020 and 9.2% in 2021.

Inflation is now reaching levels never experienced in modern history

In March 2022, the Bank of Mauritius raised the repo interest rate for the first time since 2011. A month later, Mauritius’s central bank sold $200m to commercial banks at Rs42.95 per dollar to prop up the rupee. This has been its largest single intervention in the national currency market.

The tourism sector, one of the island’s main economic pillars, was hard hit by the Covid-19 pandemic, which massively reduced the entry of foreign currency into the country. The number of tourists to Mauritius dropped from 1.4 million in 2019 to 300,000 in 2020, and only 180,000 in 2021. Exports of goods and services have also been heavily affected. The value of these exports decreased from Rs192bn in 2019 to Rs128bn in 2020 and Rs132bn in 2021.

The cumulative shortfall of forex is estimated at more than Rs120bn. This is a drop of exactly 33% in foreign exchange receipts, which impacted the national currency.

The Bank of Mauritius has been heavily involved in the government’s response to the Covid-19 pandemic. In the financial year 2020/21, the bank transferred Rs60bn to the government. It also set up an Rs80bn subsidiary, the Mauritius Investment Corporation, to help companies that have a minimum turnover of more than Rs100m. More than half of the fund has already been allocated, mainly to the tourism sector.

Bringing inflation down will depend on a lot of exogenous factors, Sameer Sharma, a chartered alternative investment analyst, tells The Africa Report. He argues that Mauritius should try to find a balance between monetary policy, structural reforms and cutting wasteful spending.

“You can’t fight inflation just by artificially increasing your economic capital level and depreciating the rupee. The central bank is undercapitalised and needs to get a ratio of economic capital to total assets of at least 12% – that is four times more than it has now,” Sharma says. “Real interest rates will remain negative. With the US tightening monetary policy, the rupee will continue to depreciate and hurt people. There will inevitably be an increase in wealth inequality in Mauritius.”

Protect the vulnerable

Afsar Ebrahim, director and founding partner of KICK Advisory Services, says those at the bottom of the pyramid are suffering from the erosion of purchasing power. “Inflation is now reaching levels never experienced in modern history,” he says. “It is driven by supply-side disruption and this trend will persist, rendering monetary policy ineffective. The battle against inflation starts with managing the currency and attracting forex through foreign direct investment and enhanced exports. Urgent social measures are needed to protect the vulnerable members of society,” Ebrahim says.

Since the pandemic began, the government has taken several measures to bolster the welfare state, yet its efforts have been weakened by the inflationary spiral. On 12 April, finance minister Renganaden Padayachy said the government had “doubled the state welfare budget [in seven years] to over Rs93bn in 2021-2022”, compared to Rs48bn in 2014.

Fuel price protests

Members of the public have been angry about the recent rise in the price of fuel. Petrol has undergone three price increases totalling 30% since December 2021. “The government is misguided. It should have found a way, by reducing the taxes, or by increasing subsidies. This decision would have a definite impact on economic growth,” says Suttyhudeo Tengur, director of the Association for the Protection of the Environment and Consumers.

The fuel price increase led to protests in Camp Levieux Rose-Hill on 20 April, when demonstrators set fire to tires and mattresses to block a main road. “The government does not care about poor people. We are working in the morning to be able to eat in the evening. It’s unbearable,” says Marianne, one of the protesters.

Pramode Jaddoo, an economist, says: “We are only at the start of the crisis. We are doomed to face further price increases that will upset all economic data, the poor and even the middle class. Depending solely on the tourism sector is a bad idea – the crisis has shown us that. We need to speed up production, revitalise our manufacturing sector, but also review our agricultural policy to improve our food self-sufficiency.”

KICK’s Ebrahim agrees. “We need major investment to attain self-­sufficiency in our food production. This will not only achieve availability of supply but ensure our sustainability and environmental goals are achieved too,” he says.

Pierre Dinan, also an economist, says the country should focus on exports. “We have to export because this country must live by imports. We have no choice. We need industries that produce goods or services that can be exported. That’s why I am always arguing for quality growth that can last, not like investments in real estate, which are productive only in the short term and have minimal multiplying effects.”

Since independence, Mauritius’s manufacturing sector has been dynamic, supported mainly by the production of sugar and textiles. However, with globalisation, increasing competition and the erosion of preferential markets, the sector’s contribution to GDP is melting away. From 25% in the 1980s, the manufacturing sector is only contributing around 12% to GDP now, while the services sector accounts for more than 75%.

The finance ministry is preparing to present the 2022/23 budget in June, but with galloping inflation, public debt that reached 89.5% of GDP at the end of December and a devalued local currency, it will have its work cut out to reconcile social and economic imperatives.

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