A NECESSARY DIVERSIFICATION IN THE FACE OF THE VICISSITUDES OF TOURISM

The islanders are exposed to all winds, with the pandemic affecting tourism and the Russian invasion of Ukraine involving consumer prices. Unemployment has fallen due to the normalization of entry requirements from Europe, from a peak of 10.5% in early 2021 to 8.1% in mid-2022, thanks to a complete lifting of restrictions at the end of June 2022. Nevertheless, galloping inflation, linked to almost all energy and consumer goods being imported, will weigh on household purchasing power in 2023. Moreover, the prospect of a recession on the Old Continent augurs a slump in tourism, a sector that accounted for as much as a quarter of the wealth produced and of jobs and half of the net exports in 2019. To support households, the government announced a 17.6% increase in social assistance (32.2% of total public spending) and continued price controls on necessities such as flour, cooking gas, and baby food. These social measures should help avoid declining household consumption, expected to reach around 80% of GDP in 2023, despite the uncertainties and normalization of the monetary policy conducted by the central bank. 

Raised to 3% in September 2022 from 1.85% during the pandemic, the Bank of Mauritius’ primary interest rate should continue to be used to fight inflation, with the governor considering that “the central bank will be less and less accommodating as the recovery takes hold.” This should have a moderate effect on construction, another growth driver, and also correlated with tourism. 

Although Mauritius is benefiting from a temporary strengthening of global demand for textiles (16% of exports and 5% of GDP), its manufacturing base continues to erode, weighed down by a relatively uncompetitive labor force. Modernization and diversification (industrialized refining, biomass plant, bioethanol) are helping to renew the sugar industry (6% of exports). The country hopes to revive itself with the maritime economy, fintech (50% of the GDP comes from finance), and diversifying visitors’ profiles. Renovated infrastructures to increase the capacity of the capital’s port were delivered in 2017, the island is promoted as a luxury destination with tax incentives for high-end real estate, and professionals have recently been seeking to attract Asian travelers.

MACROECONOMIC TRENDS LEADING TO IMBALANCES

The Mauritian government is expected to maintain a relatively comfortable fiscal space in the coming years, with a deficit offset by sustained growth and moderate interest rates. This deficit will finance limited and inefficient investments in an already weak infrastructure and an increase in the minimum retirement pension by 50% in 2023 (0.8% of GDP). Ceteris paribus, the aging of the population should weigh on public finances, with the dependency ratio (for those aged 65 and over) rising from 0.4 pensioners for one active person to 0.5 in 2034. Social expenditure is significant: 9% of GDP and a third of public spending. With a stock mainly issued in Mauritian rupees, the State will suffer from higher debt servicing with the rise in rates. As Port Louis favors local financing, the domestic holding rules out the prospect of a possible exchange rate crisis but not that of over-indebtedness.

In 2023, the current account deficit is expected to narrow thanks to the recovery of tourism and textile exports to Europe. Free trade agreements with India and China should support transshipment and financial services. In the long term, continued strong dependence on external supplies, logistics dependent on insularity, and price fluctuations, are expected to maintain this deficit in negative territory. The removal of the FATF and EU list of tax havens at the end of 2021 will encourage the return of portfolio investments. These inflows, a renewed attractiveness favoring FDI, and a decline in levels should facilitate financing the current account imbalance. Global business companies are making the archipelago the “Luxembourg of Africa”: their profits “repatriated” in dollars are recorded as primary income and deposited in local banks. Although their outward investment flows are not documented, their net financial flows are considered positive for the balance of payments. However, liquidity risks could arise from their deposit volume (equivalent to 120% of GDP).

STRENGTHENING TIES WITH INDIA AND CHINA

Together with its coalition partners, the Mauritian Alliance, led by Prime Minister Pravind Jugnauth, held on to a comfortable majority in the National Assembly after the 2019 parliamentary elections, the next of which will be in 2024. Calls for criticism of the chief executive have raised concerns about freedom of expression. However, his pro-business policies are not expected to face serious opposition, with left-wing parties remaining divided and public approval being high.

Externally, Mauritius will continue to maintain strong ties with European countries, China, and India, its main economic partners. Mauritius has signed a Comprehensive Economic Partnership Agreement (CECPA) with India, which came into force in April 2021, and a free trade treaty with China scheduled for January 2023. Finally, despite the advisory decision of the International Court of Justice requiring the UK to transfer sovereignty over the Chagos Islands in 2019, London has yet to show any willingness to make concrete progress. As of 2019, India has built a forward air base on Agalega, repositioning the island state as the ‘Star and Key of the Indian Ocean.’