INTRODUCTION

This Memorandum outlines the views of the Joint Economic Council with respect to the 2000/01 Budget. It is divided into two parts; Part I refers to the concerns of the Private Sector with respect to the present context while in Part II, we highlight our Budget objectives and submit our proposals.

PART I

PRESENT CONTEXT

The main challenge facing Mauritius, to-day, is to successfully effect a transformation of the economy to cope with a situation that is becoming much more complex both on the domestic and the international fronts. Mauritius has to, simultaneously, face an extremely difficult and competitive global environment characterised by a falling Euro and the inflexibilities of the economy.

In this context, three of the most pressing issues which must be forcefully addressed are:

(i) the increasing risk of high unemployment;

(ii) the growing unpredictability in our business environment with its adverse effects on corporate re-engineering; and

(iii) the unfavourable trends in a number of major macro-economic indicators.

Mauritius has also to address urgently the perceived deterioration of law and order in the country.

(A) Increasing risk of high unemployment

Despite a respectable average annual GDP growth rate of around 5,5% over the last decade, the economy of Mauritius is confronted with serious structural constraints which do not favour the creation of significant employment opportunities.

The EPZ which has been the main generator of employment in Mauritius over the last 15 years can no more, in its present form, respond to our employment requirements. This year, the EPZ will shed at least 3 000 jobs instead of having created 6 725 and 1 258 employment opportunities in 1998 and 1999, respectively. Indeed, the 6,4% unemployment rate in the country last year is the highest recorded since 1986.

Unemployment is expected to continue to increase this year and may reach 7%. The risk that this rate goes further up and above the 7% mark should not be completely excluded.

Notwithstanding last year's drought and the recent plunge in the Euro, the structural weaknesses of the economy have been recently exacerbated by a wide range of policy incoherence which is most detrimental to job creation; these inconsistencies would relate mainly to the following issues:-

(i) The inflexibility in the labour market and the failure to integrate the productivity factor in the wage-settlement mechanism.

The growth in productivity has been slackening; multifactor productivity growth for the manufacturing sector alone has fallen from 6,8% in 1995 to only 0,1% in 1998.

The various salary awards last year have cost more than Rs 1,4 billion to the Private Sector representing an increase of 6% on the total wage bill.

(ii) The absence of a more national integrated strategy of our training policy.

There is a wide consensus in the country to-day that there is a shortage of skilled manpower and that our training needs have not been adequately catered for.

(iii) The monopolistic situation in the telecommunications environment.

The absence of competition in the provision of internet and value added services in the telecommunications sector is depriving Mauritius from a quantum leap in productivity gains and preventing our quick entry in the 'new economy'.

(iv) The delay in reviewing the air access policy.

The formulation of a new competitive air access policy together with the necessary institutional arrangements has not yet been undertaken.

(v) The absence of a clear non-banking financial services regulatory framework.

The Financial Services Authority, announced more than six years ago, is yet to be implemented.

(vi) The delay in overhauling the Industrial Expansion Act and the setting up of the Board of Investment.

The integration of the domestic economy is long overdue in order to improve the efficiency of investment in the country. Furthermore, the Board of Investment which was meant to rationalise and streamline all administrative hurdles related to investment - domestic as well as foreign - has not yet been set up.

(B) Deterioration in the business environment and its adverse effects on corporate re-engineering

Among the main factors which have contributed to the deterioration in our business environment and an erosion in investors' confidence, we wish to mention the following:-

(i) the conflicting positions announced in the October 1999 Policy Statement on Telecommunications, the White Paper and the 1999/2000 Budget Speech on the opening up of internet services;

(ii) the swings in the range and scope of activities of a number of Government bodies, namely the State Trading Corporation and the Mauritius Freeport Authority;

(iii) the hazy stand of the Government with respect to Price Control;

(iv) the recent overhauling of the Blue Print on centralisation in the sugar industry by the Seetulsingh Report, the decision of the PAT to introduce the 40-hour week during the crop, and the change in the Government's policy concerning electricity-generation from bagasse; and

(v) the lack of transparency and the long delay in the process of granting permits for investments.

The above inconsistencies have far more reaching impact on the business psyche and delay the much-needed process of corporate development and expansion that will enable the Private Sector to seize new business opportunities.

(C) No major improvement in a number of important macro-economic indicators

(i) The savings and investment rates of 24,4% and 25,1% respectively for the current year are still far from the targets set in the New Economic Agenda.

(ii) The budget deficit, which has been forecast at 3,2% of GDP for the current financial year, continues to be a cause for concern.

(iii) The level of the public debt, which is around 48% of GDP, is not showing any sign of improvement.

(iv) The trade deficit in 1999 has reached a record high of Rs 17,3 billion, an increase of 79% over the previous year.

In the light of the above, the JEC feels that there is an urgent need for Government to correct these policy inconsistencies. During such difficult times, it is imperative that we in Mauritius and as a nation stand up to face together the economic and social challenges.

PART II

OBJECTIVES OF THE 2000/2001 BUDGET

The JEC believes that the main focus of the 2000/2001 Budget should be to bring about an economic transformation which would put Mauritius on a high growth path within the next 3 years. This transformation will take place if we work towards meeting, inter alia, the following objectives:-

(i) to bring about more coherence among the various sectoral policies and in the overall macro-economic policies;

(ii) to remove all inflexibilities and rigidities in our economy;

(iii) to integrate the whole economy through a complete harmonisation and rationalisation of investment regimes;

(iv) to create the proper regulatory framework for an effective level playing field, with clear demarcation between regulators and operators, and with the autonomy of regulators distinctly established;

(v) to develop a clear regulatory framework for our financial services sector; and

(vi) to hasten the opening up of the telecommunications sector in order to facilitate the emergence of the 'new economy'.

While the Private Sector is aware of the market opportunities of both the new EU-ACP arrangement and the Africa Bill, we have to point out that Mauritius will not be able to maximise all these potentials if we do not modernise our production capacity. The effect of the Euro on the profitability of our enterprises is already holding back the necessary investment.

BUDGET PACKAGE

In order to move towards the above objectives, we would suggest the following package:-

(a) Fiscal discipline

In order to sustain our economic goals, it is of paramount importance that the Government maintains coherence in its macro-economic policies. This should be the case for fiscal policy.

We observe that, in spite of the efforts deployed by the Government, the containment of public expenditure continues to pose a serious problem. During the period 1994/95 to 1998/99, the increase in recurrent expenditure was above 53%. We believe that without a well-defined programme of expenditure control, it will be extremely difficult for the Government to bring down the budget deficit to the target level of 2% as enunciated in the New Economic Agenda.

In the JEC's Memorandum on the Budget last year, we proposed an action plan to contain public expenditure, incorporating civil service reforms, targeted social transfers and pensions reforms. This could form the basis for an elaborated programme of expenditure control by the Government.

(b) Removal of rigidities in the context of the new monetary and exchange rate policy

The main objective of the monetary and exchange rate policy of the Bank of Mauritius is to achieve price stability. This policy, unfortunately, will not be sustainable if the wide range of inflexibilities which, at present, are preventing our enterprises to make the necessary adjustments, are not removed.

The 20% depreciation of the Euro vis-à-vis the Mauritian Rupee since January 1999 is exerting considerable pressures on our export industries. Many enterprises, which are performing well at the operational level, are experiencing financial difficulties only because of the weakness of the Euro. Indeed, the depreciating Euro is dramatically impacting on the 'bottom line' of our enterprises and this could create serious disruptions in the already precarious employment market. The 2000 export earnings could go down by almost Rs 3,5 billion if the Euro were to stay below 90 US cents.

The transition period must therefore be carefully managed so as not to put into peril our enterprises and the corresponding jobs. The following rigidities have to be addressed urgently and the 2000/01 Budget should send a very clear signal including a time table during which the following obstacles would be removed:-

(i) Review of the current wage-settlement mechanism

The annual salary compensation, being based solely on the increase in the CPI, is extremely damaging to the competitiveness of the Mauritian products. It does not recognise at all the productivity factor. The present system, in fact, leads to a vicious circle in which inflation and salary compensation are chasing each other.

It is high time that the whole wage-settlement mechanism be reviewed. Mauritius will not be able to join the rank of high performing economies without an improved system in which productivity is one of the determinant factors.

We welcome the announcement of the Minister of Finance to review the formula for wage compensation during the next financial year and wish to reiterate our full support in this new exercise.

(ii) Integration of all sectors of the economy through a harmonisation and rationalisation of all investment regimes

The initiatives stated by the Government a few years ago to move towards a rationalisation of the different investment regimes should be completed.

Government has already abolished customs duty on all industrial machinery and equipment last year. Raw materials used by the EPZ enterprises are already duty-free. Therefore, we propose that this year, all raw materials, whether they are inputs of EPZ companies or non-EPZ enterprises, be imported free of customs duty. This measure will definitely be a major stride towards the integration of all industries in our economy and will result in more price-competitive products manufactured by all enterprises.

We also note that the number of rate bands of import duty has been reduced over the past years from 60 to 11. We believe that we can further streamline the structure of our import duty with only 4 rate bands.

With a standard corporate tax of 15%, zero customs duty on all industrial machinery and equipment, and zero customs duty on all raw materials, the need to have a multitude of schemes under the Development Incentives Act and the Industrial Expansion Act would not arise. We believe that the time is most opportune for the Government to make a major overhaul of the investment incentive regimes.

We also hope that, with the completion of the harmonisation and rationalisation process whereby all commercial activities will be subject to the same treatment, there will exist a real and effective level-playing field among all economic operators, including the Government-owned bodies.

In this whole process, the Government is, moreover, presented with an excellent occasion to effect a complete harmonisation of all the investment promotion agencies.

(c) New impetus to the development of the financial services sector

There is no doubt that the significance of the financial services sector in our economy will keep on increasing in the coming years. It is therefore vital that we strengthen the structure and framework of this sector so as to enable it to meet the exigencies and requirements of the operators as well as to guard against any contagion effect that may perturb the well-functioning of our financial services sector. To this end, we wish to suggest the following:-

(i) the setting up this year of the Financial Services Authority - the FSA Bill has for too long been delayed and the JEC invites the Government to bring the long overdue legislation to the National Assembly in the current Parliamentary session;

(ii) the acceleration of the process towards the integration of onshore and offshore activities in the country; and

(iii) savings in Mauritius should be encouraged by allowing non-insurance financial companies to sell long-term financial products.

(d) Facilitate the emergence of the 'new economy'

The revolutionary technological advances, including powerful personal computers, high-speed telecommunications and the internet are transforming businesses all over the world. The new rules of the game now require speed, flexibility and innovation for success.

Access to an enhanced information infrastructure providing adequate bandwidth at affordable prices requires a competitive marketplace.

The policy announcement contained in the White Paper on Telecommunications and in the 1999/2000 Budget with respect to the opening up of internet should be implemented forthwith. It is vital to ensure that we participate fully in the information society and avoid the risk of the emergence of a "digital divide".

(e) Training

The training policy in place is inadequate and more effective measures need to be taken rapidly in order to keep pace with the development of the country. The emergence of the 'new economy' in Mauritius has equally been thwarted by the shortage of skilled and qualified personnel in the information and communications technologies. We need, in Mauritius, a minimum of 5 000 professionals in this sector. But, right now, we have only 1 500 IT professionals. Moreover, the employment of foreign workers in the textile and apparel industry strongly testifies the inadequacy of our training policy towards reaching higher productivity.

We therefore propose that a complete review of all the existing training programmes be made and, in the light of the findings, to implement appropriate courses that will really cater to the needs of the various sectors and industries in terms of skilled manpower.

In view of the expected rise in unemployment, we need a structured process to devise a national re-skilling strategy that would enable our workforce to retrain and eventually to take employment in new and emerging industries.

CONCLUSION

Mauritius is now at a most critical phase of its development. We have no other option than to bring about the necessary economic transformation that will pave the way to increased growth and prosperity in the country. In this Memorandum, we have highlighted a series of issues which, we believe, would contribute towards the transformation of the economy. The JEC hopes that, in the context of the 2000/01 Budget, the Government will effect the much-needed and vital restructuring of our economy that will enable Mauritius to seize new opportunities as well as reinforce our capacity to overcome new challenges. Let us also add that the Government's efforts towards this end should not be limited only during this year's Budgetary exercise but should be unabatedly pursued throughout the whole of the next financial year.

24 May 2000