Economist Manisha Dookhony gives a broad overview of the current local and international economic situation. She talks to Investor’s Mag about the impact of the surge in inflation for the Mauritian economy and how the country can tap into the opportunities in Africa.
Featured in Investor’s Mag, 21th Edition, June 22 – Aug 22
How would you describe the current economic situation of Mauritius?
We are currently in a difficult economic situation, and we are facing real economic challenges. Debt- We are on very high debt levels, likely above 100% when considering both government and debt by government-owned entities. The advantage we have is that most of the government debt is locally sourced and thus does not have exchange rate issues. Inflation is on the rise both locally and globally and we may get into a spiral of higher inflation levels. The good thing is that we are on a recovery path for our GDP growth, this will help us catch up on growth loss over the past 2 years. However, we still need to develop a new economic perspective in new economic sectors and economic vision, in particular, put in place new avenues for expanding private sector Investment. Our Fiscal space is tight, while the monetary space seems a bit more comfortable.
Mauritius FDI remains concentrated in the real estate sector for many years. Why, according to you?
Firstly when the sugar prices started going down, we had the dwindling of this land-based sector. Land previously under sugar cane utilization was converted for more profitable use.
The real estate sector is also intimately linked with the live and work strategy of Mauritius and the strategy to attract high net worth individuals. This strategy has been quite successful with the increasing number of retirees, high net worth individuals, and work expats that have come to Mauritius over the past decade. And it seems that since this is a strategy that has worked, the promotion focus has been on this sector more than any other. There is also a belief that Mauritius is not competitive in any other sector. One caution in this is that being in touch with the property market, I am also aware that many projects have been announced but awaiting to be started or completed. There are, for example, various projects holding PDS certificates that are looking for investors to take over the entire project.
Inflation is something everyone has been talking about. What is the impact of inflation for the Mauritian economy? What is true, what is false about it?
Inflation is a reality that we cannot ignore. I think the best way to understand inflation is to ask the housewives who, with each purchase, have fewer and fewer products in their shopping carts for the same budget… As such, it has the effect of discouraging people.
By raising prices, inflation reduces the value of the rupee. With the prices of goods and services constantly rising, the value of money goes down. With people’s income staying the same, there is a real impact on purchasing power, and the general standard of living drops dramatically.
It can thus impact saving as money constantly loses its value. The high cost of living leaves our population with very little money to save. Those who have the means will prefer to put the money in safe investments and in Mauritius, it is often in the purchase of a plot of land.
Inflation can have a very negative effect on investment and employment, which becomes more serious with the severity of inflation. Inflation may also affect our balance of payments. We are already facing import inflation which worsens our balance of payment. It also affects the price of locally produced goods as we have seen with chicken, as the cost of inputs also go up.
Inflation affects lending and borrowing. Creditors always lose during periods of inflation simply because by the time their debtors pay them back their money, it loses value. On the other hand, debtors gain during periods of inflation because they end up repaying less than the amount they borrowed. As a result, inflation makes lending harder for people to lend money and for people to access loans.
How bad can inflation get and why should we be so scared of it in those circumstances?
We are still under the influence of Covid. There are new confinements in China, including in Shanghai. The ripple effect of the Russian-Ukrainian war is beginning to impact the Mauritian economy. Prices continue to rise. Suppose you look at trends over the past three months. In that case, one can easily assume that the effects of the war in Ukraine are now filtering through to inflation, with price increases for energy, transportation, construction material and food items.
Further increases in the prices of oil, gas, wheat, wheat products – pasta, bread, etc., corn, corn products, fertilizers will, unfortunately, lead to rising inflation, in a period where we are already facing inflationary pressures caused by Covid crisis and supply chain disruptions. The main risks are exacerbated by the Russian-Ukrainian crisis.
Interventions on the exchange rate market in Mauritius have tried to contain the depreciation of the rupee; hopefully, that will help in containing import inflationary pressures.
Growth rate outlook of European countries has been slashed. With the possible expansion of NATO, there are real chances that the war may be prolonged and may further engulf European countries in an economic slump. The IMF has already reduced growth in Europe. This will undoubtedly impact our tourism and our exports in the medium term and, therefore, our growth outlook as well.
Mauritius signed 3 free trade agreements with China, India and Africa, what’s the potential of such agreements for Mauritius ?
First, let’s look at the China and India Agreements, the FTA and CECPA. Both agreements seek to promote commerce between the two countries.
The agreement with China provides trade preference access on 8,547 items. This is significant as it represents 96 % of the Chinese tariff lines. Under CECPA, Mauritius gains from trade preferences on 615 products. These trade preferences are of 3 main categories including- Duty-free access is allowed for 376 goods, Reduced Duty on 127 items and Tariff Rate Quotas on 112 products.
The China-Mauritius Free Trade Agreement is a significant milestone because it is China’s first agreement with an African country. It perhaps gives Mauritius a 10-year window and competitive edge before China starts signing similar agreements with other African countries. The offer products for duty-free export to China access is very large compared to that of India. The rules of origin for exporting to China is simpler to achieve for Mauritian products.
In the larger perspective of the AFCFTA, it is possible that this advantage provided under the China Bilateral Treaty also provides Mauritius with added leverage in its production and exports to Africa. Mauritius has the potential to, for example to, assemble imported Chinese products such as electronics and automobile spare components for the African continent. In relation to the Biopharmaceutical sector, many African countries are also envisaging going towards that sector, and China is the second-largest Biopharma developing country. As such, Mauritius could become a relay for the supply of inputs for the sector in products such as excipients. The main question is does Mauritius have the production capacity to export the vast range of products that it has preferential access to, and in the right quantity.
In terms of services trade, both FTA (Mauritius-China) and CECPA (India-Mauritius) have large benefits for Mauritius. The agreements between India and China include some similarities but also major differences. Mauritius allows for the entry of the services sector. Accounting and bookkeeping services, architectural services, medical and dental services, telecommunication services, banking, and other financial services are just a few examples of common services. Moreover, India has also committed to providing market access in 94 service categories, including professional, business, financial, and telecommunications services.
Under CECPA, Professional Bodies may negotiate mutual recognition of academic and employment qualifications in the fields of architecture, engineering, healthcare, dental, accounting, and auditing within one year of the agreement’s entry into force.
As the services sector accounts for more than 75 % of Mauritian GDP, and investments in this area would provide it a boost. We may want to be mindful that the openness may also lead to competition between Mauritian, Chinese and Indian service providers.
Indian and Chinese businesses might gain from utilising Mauritius’ bilingual or even multilingual proficiency to serve both francophone and anglophone Africa. It is more likely given the affinity between Mauritius and India, Indian investors would avail advantages under CECPA services chapters.
In terms of the CECPA’s impact on Mauritius’ financial services, it is important to note that the bilateral agreements made within the framework of the CECPA to reduce barriers to financial services in Mauritius (for example, by lowering entry requirements) would allow Indian financial institutions to participate in the Mauritian market.
On a more general point, it is interesting to note that while the Mauritius-India trade agreement (CECPA), took more than 20 years to complete, the FTA with China took less than 5 years and would probably have been signed earlier had it not been for COVID. Could that have been linked to India being hesitant to sign the economic cooperation agreement or issues linked to the DTAA? The signature of CECPA so soon after the China Mauritius FTA is a sign of the rivalry playing out between the two countries in Mauritius.
An important element for Mauritius would be to concentrate its efforts on niche markets in China and India, where Mauritius can export high-value local products.
One interesting feature of the China FTA is the establishment of a Renminbi Clearing house. This aims to simplify trade by allowing transactions to be conducted directly in renminbi rather than in US dollars. If it does happen, it will be a cost-cutting opportunity not just for Mauritian business, but also for African businesses. The Chinese have set up regional clearing renminbi centres around Africa, with Mauritius being one of them that will enhance the network. This also represents a likely intention to move away from the dollar-dominated trade. Although, this may take longer to materialize.
Regarding the AFCFTA, I think there is a lot of prospects for Mauritius. However, today only a few countries are ready with their customs infrastructure to make free trade happen. In the interim, we can focus on expanding our exports to these few countries that are ready, but we should not forget that we have advantages under other agreements such as SADC and COMESA.
How can Mauritius crack the opportunities offered by the African continent?
The African continent contains untapped wealth. However, apart from a few individual successes. Many are companies not known in Mauritius. This says a lot about the chances of success in Mauritius where some sectors are quite compartmentalized and competition is locked but also about the opportunities in Africa.
As an immediate focus, we can look at our services offering and analyse the sources of growth in Africa, including Green economy- Solar energy, hydro, Digitalization and technologies, Services to make life easier for citizens e.g. banking and of course, manufacturing. With respect to the latter, during the confinement and the difficulties of traveling to Africa, online fairs have allowed many commercial breakthroughs in South Africa.
We also know that some countries are getting their infrastructure ready for AFCFTA agreement. As such, I think we can export our services, offer our knowledge and facilitate Mauritian private investors in the growth sectors.
For that, we need to be more targeted on certain sectors or types of projects.
We also need to set up agencies that provide technical and financial support. Take the example of France, you have the AFD or Proparco, which supports projects of French citizens abroad. Similarly, German investors have GIZ for the technical side and financial support. JICA supports Japanese investment. India and China have their Exim banks. We have neither an international development institution nor a bank with a vocation to support companies and projects geared towards Africa. We could, given that we are a high-income economy with good economic success, envisage to create such institutions.
I also think there is a lack of real economic diplomacy, there are few embassies across Africa. Most of them are political in their focus and thus lack the strategic goal of facilitating Mauritian investments in Africa. We do have consular representatives who are often more import/export-oriented than investment-oriented.
There is the perception that investment in Africa is very risky and thus, want to focus their business where profit lies in Mauritius. Whether this business strategy will pay off in the long term remains to be seen, as to me, the future is Africa. Some companies are trying to replicate the model they used to succeed in Mauritius; many decision-makers believe that Mauritian captains of industry are the ones to put forward for projects in Africa. But all this does not presuppose success.
We have seen projects that go straight into the wall due to a lack of knowledge of the countries, their cultures, the economy, and politics. For the companies that I advise in their African projects, we work a lot on all the modalities that would ensure their success in a sustainable way. We adapt to the country’s specificities.