‘Mauritius is catalysing finance for Africa’ – Padayachy

By Nicholas Norbrook
Posted on Wednesday, 12 October 2022 09:27

Mauritius Minister of Finance Renganaden Padayachy
Mauritius Minister of Finance Renganaden Padayachy (rights reserved)

Mauritius is the African poster child for development through trade; now it wants to take its experience back to the continent says Renganaden Padayachy, Minister for Finance, Economic Planning and Development . In this in depth interview he calls for immigration to help boost Mauritius's falling demography, and explains the unconventional policies used by the Central Bank in 2020 to save the hotel sector, and avoid sparking a run on the banks.

Like finance ministers around the world, Renganaden Padayachy has been waking up late at night worrying about how he is going to keep the lights on given spiralling energy bills. The answer: a huge push into green energy. “By 2032, 60% of our energy production in the energy mix will come from renewables”, says Padayachy. “It is going to have a major impact on our trade balance”.

He is also hoping that in so doing, Mauritius will be able to become a hub of green energy expertise and innovation. And perhaps repeat a trick that it has already managed in various other sectors, including textiles and food processing, where the country gradually moved into higher and higher value niches.

“We were a poor country after independence… we got a report from a Nobel laureate saying this country was going to hit problems because it had no resources”, says Padayachy. “The only resources were the people, so development started with free education, with our welfare state.”

Then independence era leader Sir Arnaud Jugnauth chose to open up the economy, gradually bringing down trade barriers , “while now more than 95% of products in Mauritius come in duty free,” says Padayachy.

Key was reciprocity in the opening up of economies – something that has been the leitmotif of the Africa Continental Free Trade Agreement (AfCFTA) established in 2018. And while not all African countries have been so quick to adopt a liberal approach to trade, admits Padayachy, “most are now seeing that it is essential to get the higher growth we need – and we need trade within the continent first of all.”

African Connectivity

The key roadblock is connectivity. “It is often easier to deal with China, India or Europe than with some African countries because of connectivity issues”, says Padayachy. “It is not just a problem of demand, it is a problem of supply”.

The arrival of Covid focused minds on the continent, he argues, especially when supplies started to be hoarded by foreign countries. “We need to have regional integration, and decentralise globalisation, not to have everyone importing from one single country.”

To help African countries develop export capacity, he points the development of Mauritius’ own industrial base, a journey that started with the state developing a monocrop country, into a period of import substitution, before bringing in foreign investors from Hong Kong and China to help bring an export focus – and critically, having the voluntarist institutions to help guide the private sector in that direction.

“We have the Economic Development Board, and Enterprise Mauritius, to both push for foreign direct investment into the country and push to develop export markets outside Mauritius,” says Padayachy.

He also points to the multiple free trade agreements Mauritius has signed to help accelerate the process; both those signed with China and India during the COVID period, in addition to those with the African Union, the UK and the EU.

Education key factor

Beyond those economic institutions, he emphasises the role of free secondary education in 1976. “Six or seven years later, we had a number of women who were qualified to enter the manufacturing sector, which was our new export sector – it was one of the ingredients that set our ‘economic miracle’ in action,” says Padayachy.

Getting the right industrial policy in place on the continent is needed, argues the minister, but beyond that, education is essential to make that growth sustainable, and to build for the future. “They are doing this in Rwanda for example, and it is very important.”

Padayachy thinks that Mauritius has a particular role to play in this dynamic; in particular, by channelling finance into African opportunities. “We have been working to catalyse investment to Africa,’ says Padayachy, for example through Mauritius’s international finance center. At home, the center contributes around $1bn to GDP, $180m in tax revenues, and has created more than 11,000 jobs.

One of the things to emerge in recent months has been efforts to push a regional payments scheme, known as the Pan African Payments Platform, championed by Afreximbank, as a way to tackle some of the soft barriers to greater African economic integration, the difficulties faced by companies in different countries who struggle to complete payments.

Cutting edge regulators

Other innovations continue to emerge, including the use of blockchain technology to help crossborder payments. Here, Mauritius is playing the role of champion of innovation; its central bank in 2018 created a ‘sandbox’ licence to allow fintech players in the space to operate.

At that time Padayachy was the deputy governor of the central bank, chairman of the Financial Services Commission, and a member of the OECD blockchain committee. “It might sound a bit ‘not conservative’, but I think it’s a normal thing, we need to go in, we need to use blockchain, we need to be amongst those countries who are going to push these revolutionary ideas.”

Nevertheless, he is keen to have it done as Mauritius has at the strategic level of state institutions, to avoid blockchain technologies being used by those who would rather use them to avoid the tax man…

“We need to bring it under the umbrella of regulators”, argues Padayachy. “And that’s why it’s very important to have an innovative Central Bank. Of course, many central bankers are conservative, but we cannot continue like that”.

Unconventional bankers

That Mauritian fibre of innovation has stood them in good stead in recent times, argues Padayachy. He points to the turbulence of the Covid period for a country like Mauritius, whose tourism sector represents around a quarter of GDP, and was under serious stress – and risked taking the banking sector down with it. “No one was coming to the country,” recalls Padayachy. “The economy contracted 15%… we really had to do ‘whatever it takes’ to keep us afloat, or risk social chaos, with 25% of people unemployed.”

That meant some ‘unconventional policy’: the creation of the Mauritian Investment Corporation (MIC) by the central bank at the height of the crisis in 2020, which, in essence, was a device used to pay staff at key resort hotels. “We have two systemic banks in Mauritius, and the hotel industry was heavily indebted to these banks,” says Padayachy. “If those hotels were going to go bankrupt, these two banks would have had serious issues, and afterwards affected the banking system in Mauritius.”

Rather than allow an external shock to infect the banking system, the state stepped in. “The World Bank say we are fourth in the world in terms of per capita spending to preserve the economy,” says Padayachy.

The equity position that the MIC took in these hotels is not dissimilar to the actions taken by Western economies in 2009 when the financial crisis brought banks to their knees – and like the way in which the UK government actually made money when it finally sold off shares in banks that it had rescued. The Mauritian government, “is making a positive return out of these investment’, says Padayachy – but it did not stop the IMF from recommending that Mauritius sell-off its stakes in the sector.

The unconventional stance worked. Economic activity is back to 2019 levels, with a million tourists in 2022 projected, even if debt levels will take some time to recover, says Padayachy.

Would they consider selling the stakes in the hotels to help increase reserves, and sterilise some of the excess liquidity in the system? Padayachy says that Mauritius is using some of the returns to mop up liquidity, but importantly, “we still have those reserves, about $7bn outside Mauritius, more than 15 months of import cover.” And the banks themselves are now solvent again – for years they had been reporting a loss, but “this year they are on a positive trajectory,” he says.

The ‘Grey List’ struggle

While Mauritius certainly has lessons for the continent, they are not all about climbing the ‘value chain’ with a focus on industrial policy and trade. The country was also forced into a reckoning over what the OECD viewed as damaging financial secrecy laws, which allowed unscrupulous investors into Africa to take money out without paying appropriate tax levels, or even facilitated corruption.

In February 2020, a month before the Covid-19 reckoning, the OECD put Mauritius on what is called the ‘Grey List’ by the Financial Action Task Force (FATF) – a list of countries whose tax arrangements are considered damaging and fall foul of global regulations around money-laundering and the financing of terrorism. After over a year of work, Mauritius ended up in October 2021 being taken off the list.  In January 2022, Mauritius was also taken off the EU list of high-risk third countries and is no longer considered an ‘uncooperative tax jurisdiction’.

“We succeeded in this because we had the necessary political commitment from the highest level,” says Padayachy. “When we were hit with FATF conditions, the Prime Minister set up a ministerial committee, as well as setting up a committee with all the key regulators, to week by week change the financial structure of Mauritius”. While he admits it has hit the sector’s growth, he says this is just short term.

And while Mauritius did suffer a downgrade, “Mauritius is one of the only countries in Africa to have investment grade debt,” says Padayachy, who believes efforts being made to reduce debt will soon allow a new uprating.

A rare call for immigration

But the country will have to get a move on. Like Europe, Mauritius is ageing. Can its pension funds cope?

Padayachy wants to do two key things to help avoid problems down the road. The first is to bump growth rates up to 5%. The second is to get more people to move to Mauritius, “because we know that we are on a decreasing trend concerning the demographics”.

Some of this may happen through tourism, and the ‘grey economy’ – bringing in older tourists who may want to spend their later years on the island. Some may come through decreasing inequality, which has been shown to help boost the fertility rates. But much may come through immigration.

After talking to various economic sectors, and doing surveys of businesses, Padayachy says “I think we need some 50,000 new people to come to Mauritius.” New fast-track immigration rules are being drawn up; extension of work permits has been boosted from 5 to 10 years.

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