I. INTRODUCTION        

The spectacular growth of the Mauritian economy in the second half of the 1980’s and early 1990’s was due to substantial investments, both local and foreign, in the productive sectors of the economy.  The key factors of development which gave Mauritius a competitive advantage in attracting investment were, among others, its relatively low labour cost and low direct taxation as well as its non-reciprocal preferential market access under the Lomé Convention.  It is clear today that a number of these factors and strategic assumptions which guided policy making and drove economic development during that period have now changed.

The Private Sector reckons that a number of initiatives to adjust the economy of Mauritius to the changing international context have been launched.  We wish here to mention, in particular, the reform already initiated in the sugar industry as elaborated in the Sugar Sector Strategic Plan and the modernisation of the legal and regulatory frameworks in the financial services sector with the enactment of several legislations and the setting up of the Financial Services Commission. 

The pace of economic re-engineering has to be maintained in order to enable the country to urgently address its falling competitiveness.  That is why the JEC believes that the uncertain future economic prospects of the country, the declining trend in investment and the inefficient national business environment as well as the means to turn around these negative trends should be the focus of the forthcoming budget.

This Memorandum therefore contains the views and proposals of the Joint Economic Council for the 2002/2003 Budget with respect to the focus highlighted above.   

II. PRESENT CONTEXT

There is no doubt that the economy of Mauritius is faced with structural problems, unlikely to be resolved by short-term macro economic measures only.  The future economic prospects of the country are uncertain and, accordingly, structural reforms also need to be undertaken.

A. UNCERTAIN FUTURE ECONOMIC PROSPECTS OF MAURITIUS

(i)  GDP Growth Prospects

GDP growth has been quite volatile during the past 5 years due mainly to the performance of the sugar sector which is largely dependent on exogenous climatic conditions.

The GDP growth in Mauritius over the last ten years, excluding sugar, was on the average, of the order of 6%.  The Central Statistics Office has revised downwards the growth estimate for the year 2001 from 5.9% to 5.4% while GDP is forecasted to grow by 5.3% in 2002; both figures are lower than the 10-year average of 6%.  As a matter of fact, the forecasted GDP growth, excluding sugar, for 2002 is the lowest over the last ten years. 

Table A: Real GDP growth rates excluding sugar (%)

The performance of the main productive sectors of the economy has also been on a declining trend over the recent years:

•  The growth trend in the EPZ sector is a cause for concern.  Growth has been continually falling from 6.9% to 6% to 4%.

• Tourism is expected to pick up this year with a growth of only 4% compared to a very low growth rate of 1% last year.

•  A number of planned capital development projects were not undertaken last year.  The construction sector grew by only 1% as compared to the forecasted 3.5%.

Table B: Sectoral growth rates (%)

(ii)  Unemployment and Inflation

The indicators for unemployment and inflation are not positive – they are both rising.  Government has to take strategic policy decisions to remedy this situation by adopting aggressive measures which will boost investment and employment. 

Table C: Unemployment and inflation rates (%)

(iii)  Public Finance

Budget deficit is expected to stand at 6.5% for the current financial year.  According to the Ministry of Finance, on a no-policy change basis, the budget deficit is expected to rise to 7.8% for the next financial year.  Mauritius cannot sustain such levels of budget deficit.

Table D: Budget deficit (% of GDP)

Public debt is being maintained at around 50% of GDP though in absolute terms, the amount of debt has significantly risen in the past few years.  

The “non-accounted” activities have become over the last few years a growing concern for the country.  A number of business sectors, like tourism and commerce, are being adversely affected by the “non-accounted” activities.  They also represent a significant revenue shortfall to the Exchequer.  

B. DECLINING TREND IN INVESTMENT FLOWS

The investment rate has been declining continually from 27.5% of GDP in 1999 to the forecast of 22% in 2002.  As for the share of private sector’s investment in total investment, it has decreased from 76% in 1999 to an estimated 66.4% in 2002.  Foreign direct investment is almost non-existent.  As such, FDI for the last few years involved mainly the subscription of equity stakes in existing companies rather than investment in new physical assets.

The investment growth rates in the productive sectors (Agriculture, EPZ, Tourism) for the last few years have been negative. 

On the other hand, there is growth in investment in Public sector.  For 2001, investment growth in the Education sector was initially forecasted to be of the order of 144.4%.  According to the latest estimates, growth in that sector turned out to be only 4.7%.  For the year 2002, the authorities are now expecting an investment growth of 219.1% in education.

Table E: GDFCF – Annual real growth rates (%)

This trend in investment is a matter of serious concern in terms of sustaining the competitiveness of Mauritius and job creation.  As a matter of fact, the ranking of Mauritius in the 2001-2002 Global Competitiveness Report fell from 38^th to 52^nd with respect to the Current Competitiveness Index.

Low investment is also the result of a marked deterioration in the financial situation of the corporate sector.  Profits of EPZ companies in the Top 100 Companies have fallen by 46% in the financial year ending 2000 compared to the preceding financial year.  As to the corporate sector of the sugar industry, operating losses of Rs 289 million, Rs 700 million and Rs 300 million were made for the crop years of 1999, 2000 and 2001 respectively.

C. INEFFICIENT NATIONAL BUSINESS ENVIRONMENT

The inefficient national business environment is characterised by: 

(i) low-skills base;

(ii) inadequate regulatory environment;

(iii) inconsistent policy signals;

(iv) inflexible labour market;

(v) inadequate institutional capacity; and

(vi) lack of integration of the various sectors of the economy.

(i) Low-skills base

The output and quality of education and training in Mauritius remains a serious constraint to the development of new, knowledge-intensive, high technology and high value added sectors.  There is a definite lack of educated and high-skilled workers in the country.  Despite an enrolment ratio of almost 100% at primary level, up to 66% do not reach O level and 83% never reach A level.  Almost three-fourths of the registered unemployed as at December 2001 have not passed the School Certificate.   

(ii) Inadequate regulatory environment

There is an inadequate and, in some instances, a complete absence of regulatory framework in a number of sectors:

(a) Energy sector

There is no independent regulatory framework in the energy sector.  Decisions have, so far, been taken on an ad-hoc basis without well-set  guidelines to the potential investors in that sector.

(b) ICT sector

Although there is a shared vision to make Mauritius a cyberisland, there is no “effective” regulator in the sector.  We believe that the legal provisions in the former Telecommunications Act 1998 or in the new ICT Act 2001 are adequate.  The regulatory authority however has not been given the “capacity” to act.

(c) Air traffic rights

There is no regulator in the management of air traffic rights.  The growth industries like tourism, ICT, financial services and the knowledge-based industry generally depend, to a large extent, on good air connections for their development.

(iii) Inconsistent policy signals

A good investment environment is one which is characterised by consistent policies given that investors tend to react negatively to repeated departures from agreed policies; such frequent policy changes impact adversely on their decisions.  In this respect, we wish to highlight a number of inconsistent policy signals:

(a) Energy sector

There is a lack of clear policy signal with regard to the stance of Government vis-à-vis the Firm Power Producers and the Continuous Power Producers.

(b) Property market

The property market represents huge potential as a new growth and job creation sector.  The construction of high-class residences for retired high-worth foreigners with accompanying services for their well-being, including health, is worth exploring.  Yet the Non-Citizens (Property Restriction) Act has not been reviewed and the provisions of the new Landlord and Tenant Act 1999 have not changed the base year rent significantly and, as such, the property market cannot be fully developed.

(c) ICT sector

The position of the regulator in the ICT sector in a number of instances is in contradiction with Government’s declared policy as contained in the Policy Framework for ISPs and the ICT Act 2001.

 (iv) Inflexible labour market

Labour flexibility is vital for enhancing productivity, competitiveness and economic integration in the country.  Labour mobility allows an efficient allocation of manpower, reduces the inflationary pressure on wages and promotes multi-skilling of the labour force.

In Mauritius, intra-sectoral and inter-sectoral labour mobility is almost non-existent.  This state of affairs is due to administrative, legal and institutional constraints in the labour market as well as to a low level of education and training of the labour force.  

(v) Inadequate institutional capacity

The Board of Investment lacks the necessary institutional capacity to act effectively as a “first-class” facilitator and promoter of foreign investment in Mauritius.  Attracting FDI should be a cornerstone of our strategy to boost private investment and create employment.

(vi) Lack of integration of the various sectors of the economy

The pace of integration of the various sectors of the economy is far too slow.  This lack of integration does not promote an efficient allocation of the country’s limited resources.

III. JEC PROPOSALS FOR THE 2002/2003 BUDGET

A. BUDGET OBJECTIVES

Given the present context, the JEC believes that the measures for the 2002/2003 Budget should aim at achieving the following objectives:

(i) to increase new private investment, local as well as FDI;

(ii) to create employment; and

(iii) to reduce budget deficit and to avoid falling in the debt trap.

B. BUDGET PACKAGE

In order to achieve the above three main objectives, we would like to propose the following package; the proposals at B1 relate to restoring equilibrium in the public finances while those at B2 relate to the re-engineering of the national business environment:

B1. Restore equilibrium in the public finances:

(i) improve the tax collection;

(ii) embark on a well-defined privatisation programme;

(iii) reduce inefficiencies in the public service; and

(iv) revisit the Welfare State.

B2.    Re-engineer the national business environment:

(i) open Mauritius to the world by attracting expatriate professionals and unlocking the property market;

(ii) accelerate additional investment in ICT, energy, tourism and financial services;

(iii) review the monetary policy;

(iv) overhaul the BOI and re-steer it on the Singapore EDB model;

(v) consolidate the competitive low tax regime; and

(vi) integrate the various sectors of the economy.

B1. Restore equilibrium in the public finances

Government has announced an increase in the VAT rate in an effort, understandably, to meet the twin objectives of not falling in the debt trap while, at the same time, not taxing investment.  We are supportive of this approach provided that Government explores alternative project financing mechanisms such as BOT/BOO wherever possible and takes appropriate measures to contain recurrent expenditure.

We, nevertheless, wish to point out that an immediate increase in the VAT rate would be prejudicial to the tourism industry since hotel packages are sold 18 months in advance.  We would therefore request that a delay of at least one year be given before any increase in the VAT rate for the tourism industry is effected.

If an increase in VAT is perceived merely as a means of reducing an alarmingly high budget deficit without the whole population sharing the vision of a more modern, better-equipped and efficient “Mauritius”, then the chances of adequate support from the population will surely be lacking and the likelihood of succeeding in this essential modernisation of the country will be considerably reduced. 

(i) Improve the tax collection

Government can reduce the budget deficit by improving the existing tax collection.  According to preliminary estimates, the ‘manque à gagner’ for Government of the “non-accounted” activities is no less than several billion rupees.  Government should more effectively fight fiscal fraud and evasion, be it at customs or at the income tax department.

(ii) Embark on a well-defined privatisation programme

            Government should make a thorough review of its various stakes in a number of corporations.  We strongly believe that Government should pursue a divestment strategy and focus its limited resources on the public sector priorities for economic development.

(iii) Reduce inefficiencies in the public service

Government should control its recurrent expenditure by reducing inefficiencies and wastage in the public service.  In this context, Government should be heavily involved in the nationwide anti-MUDA campaign launched by the NPCC.

(iv) Revisit the Welfare State

Government should urgently revisit the present form of the Welfare State with a view to targetting only the needy of our society. 

We should redirect the basic retirement pensions, free education and health as well as subsidised rice and flour only to those who really need such social benefits.  We believe that there are ways and means to identify the most needy segment of our society. 

Such an approach would make our welfare system more efficient.

B2. Re-engineer the national business environment

(i) Open Mauritius to the world

It is imperative that Mauritius has an “open policy” to foreigners.  In this respect, we propose the following:

• Property market

Government should open up the property market to foreigners.  We believe that the restrictions imposed by the Non-Citizens (Property Restriction) Act demand an urgent review so as to allow foreigners to buy property in Mauritius, especially in the context of the integrated resort projects.

Furthermore, the Landlord and Tenant Act 1999, in replacement of that of 1960, has to be amended since it has maintained the status quo in the property market due to a number of fundamental flaws in the revised legislation.  In particular, we urge Government to effect the following amendments to the Landlord and Tenant Act 1999:

(a) In the Second Schedule, the “rent payable on 1 December 1993” should be replaced by “rental value of the premises determined on its value as at 1 December 1993”; and

(b) Section 14(e) should be deleted.

• Foreign professionals

Given the lack of a large high-quality human resource base, Mauritius will have to rely on foreign professionals (including Mauritian-born professionals residing abroad) to help steer the country to its next phase of development.  Activities in the ICT, the financial services and other knowledge sectors require a strong pool of skilled and qualified professionals.

Government should clearly spell out to the world its “open policy” concerning expatriate professionals.  All bureaucratic impediments to the processing of applications for the employment of high-level professionals should be removed – a fast-track mechanism should be set up for such calibre people.  

 (ii) Accelerate additional investment in ICT, energy, tourism and financial services

• ICT sector

Although the development of the ICT sector is high on the agenda of Government, the disposition and willingness to convert “words” into “actions” is missing.  Accordingly, Government should: 

(a) urgently implement the policies which have already been agreed in the Policy Framework for ISPs and the ICT Act 2001; and

(b) the competitive tariffs extended by BPML to its “clients” should become universal irrespective of their geographic location if they meet the necessary business conditions.

In order to encourage more investment in the high-tech industry, we propose that a capital allowance of 100% be given in the year investments are made by enterprises in that sector.

• Energy sector

It is not appropriate for the CEB to, simultaneously, act as producer, distributor and regulator in the energy sector.  Government should review the whole regulatory environment of the sector and put into place the conditions for more private sector investment in energy production.  To this effect, the following actions should be taken:-

(a) A clear medium-term policy for energy production from bagasse, in line with the philosophy contained in various documents [Bagasse Energy Development Programme (1991), Blue Print (1997), Sugar Sector Strategic Plan (2001)], should be established;

(b) The distinct roles of the CEB, the Firm Power Producers and the Continuous Power Producers should be clearly defined; and

(c) The Electricity Act should be overhauled and a regulatory body established.

• Tourism sector

A number of investment projects in the tourism sector, especially those with regard to integrated resorts, have been submitted to the authorities for consideration.  We hope that such projects would be examined without delay and the position of Government would be communicated as soon as possible.

• Financial services sector

We wish to make the following proposals so as to increase the competitiveness of our global business activities:  

(a) All applications for a global business licence should, as far as possible, be processed on a fast-track basis;

(b) The element of strict confidentiality in the sector should not be put in jeopardy; and

(c) Given the fact that low or no taxation is no longer considered by OECD as proof of “harmful tax practice”, Government should review its decision to reduce the deemed foreign tax credit from 90% to 80% as from 1 July 2003. 

(iii) Review the monetary policy

There is a need to review the present monetary policy.  In this context, as part of a package to give a new impetus to the economy and a strong signal to the investors, the JEC believes that the present level of interest rate should be lowered. 

A reduced interest rate would alleviate the current precarious financial situation of th