Mauritius: reinventing the Mauritian economic model



Mauritius reported its first cases of coronavirus on March 19 and closed its borders to all foreigners on the same day. It was a radical step for a small open economy, but necessary.

Subsequent containment efforts proved successful. A travel ban for foreign visitors was declared as of February 2. Contact tracing began soon after, along with an aggressive public marketing campaign about the disease and the precautions to be taken. Under a nationwide lockdown, schools, markets and even its famous beaches have been closed.

While the World Health Organization had predicted more than 20,000 cases and 1,139 deaths for Mauritius in total, the country’s rapid action resulted in just 337 infections and 10 deaths. Three active cases were imported.

With the virus epidemic now largely contained, attention must be focused on the economic and social fallout. Although Mauritius has reinvented itself before, the consequences this time call into question its economic philosophy and will require vision, creativity and innovation.

The country, heavily exposed to global dynamics, now faces a triple threat of decline in tourism, capital flight from its financial sector and growing concerns about food security. There is a need to rethink how to adapt, especially with a downturn in the global economy.

COVID-19 has devastated the tourism and hospitality industry which has effectively been interrupted by the closure of borders – both those of Mauritius and other countries. The sector accounts for around 25% of GDP and around 15% of all jobs.

French and British visitors are among the biggest contributors of foreign exchange earnings, with China also being a fast growing market. For many, the loss of income makes island vacations an unaffordable luxury. Fear of infection and the practicalities of travel will also keep visitors away. South African Airways and Air Mauritius, two of the major carriers bringing tourists to the island, have been grounded by the pandemic, and both have gone into the rescue of businesses.

However, it is not just the tourism sector that is taking a hit. The pressures in the offshore sector could not have come at a worse time. Last year Mauritius narrowly escaped the European Union’s blacklist as a tax haven – a problem that has recently resurfaced. Rejected as noise in some neighborhoods, its impact could be dramatic.

More recently, the European Commission announced that Mauritius would be added to a list of states at financial risk due to lax oversight of the fight against money laundering and terrorist financing. Despite assurances from the Mauritian government that it will implement corrective measures to be removed from the list, the immense reputational damage could exacerbate COVID-19-related exits and divestments.

Anuradha Ramphul, managing director of financial services consultancy St Lawrence Management, says the damage to reputation is already evident: “We saw a first impact outside the EU last week, for example, the Bank of Indian reserve has refused investment proposals from Mauritius. entities based in the Indian financial services industry. She believes, however, that the authorities will soon respond to regulators’ concerns.

Another setback came in May when Senegal announced it was withdrawing from its double taxation avoidance deal with Mauritius, criticizing the deal as unbalanced. It is a blow to Mauritius’ intra-African relations, amid the efforts to pivot towards the continent. This will shake up sentiment and future investment prospects, especially if other African countries follow suit.

Food security is another growing concern. Mauritius has diversified away from agricultural production (sugar and vanilla) for nearly five decades, while attracting subsistence farmers historically to the collapsing service labor market.

Mauritius imports most of its food, accounting for 20% of total imports. In a climate of growing nationalism and protectionism, many countries have restricted some food exports to protect national food security. A sudden stop of imports of basic products from any country would have a dramatic inflationary impact, increasing social pressures.

The impact of COVID-19 alone has forced extraordinary downward economic revisions. The economy is expected to contract up to 11% year on year in 2020 and unemployment will double from 7% to 17.5%. Faced with headwinds in the economy and regulation, Moody’s and Fitch revised the outlook for the Mauritian commercial bank to negative, in line with their downgraded sovereign rating.

This is not the first time that Mauritius has faced such existential shocks. Policymakers have already reacted dexterously, but this was a low-income country moving up the industrial value chain. Now Maurice must not only avoid the pitfalls of the middle income trap, but also radically reinvent himself to stay relevant.

It is therefore at a crossroads. The principles of its economic success – being attractive to international markets in an increasingly globalized world – are threatened as nationalism grows and countries turn in on themselves.

But as Claude Baissac, CEO of Eumonix argues, decision-makers must be careful not to throw out the baby with the bathwater. With its small domestic market, endogenous solutions are limited. Instead, Mauritius should use one of its main comparative advantages – its seat at all diplomatic tables.

The country’s strategic location and its geopolitical attraction for foreign powers allow it to develop new sectors and industries adapted to specific needs. The question of the Chagos is an example illustrating the rapid evolution of the geopolitics of the Indian Ocean. With India, China, United States, United Kingdom and France all having direct strategic and economic interests, this remains a unique comparative advantage.

That said, there is a need for creativity, says Kevin Teeroovengadum, a Mauritian financial executive. ‘First of all, Mauritius must aim for self-sufficiency – it is essential to reduce its import bill which has grown faster than exports over the past two decades. Second, we need to get into innovation, digitization and big data. Third, the blue economy is essential given that we are surrounded by the ocean. Fourth, put the environment at the center of everything and create an economy around it. ‘

Having already lowered interest rates and used reserves for business loans, the Bank of Mauritius recently obtained approval to take equity stakes in private companies. These investments should be directed towards industries of the future in the fields of science, technology and innovation.

The country’s established manufacturing base may grasp some of the relinquishment of China’s supply chain dependency. And its skilled, multilingual workforce can increase its share of the global business process outsourcing market. Looking ahead, Mauritius’ strong focus on services positions it to play in emerging sectors such as health and medical tourism, medical cannabis technology and green industries.

While “business as usual” is threatened, Mauritius has shown agility to adapt to a changing world. The crisis forces it to strengthen existing economic sectors but offers the opportunity to forge a new future. Doing so will require bold and visionary leadership. The question is whether the incumbents are up to the challenge.

Ronak Gopaldas, ISS consultant, director at Signal Risk and co-founder at Mindflux Training



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