Joint Economic Council
Memorandum on the 2004/2005 Budget
1. Introduction
2. Economic
context and key objectives
2 (a) International
Context
The
international economic context remains difficult in spite of a nascent recovery
in the global economy, especially in our main markets, the
The
international trade situation, in the light of the following developments,
continues to be difficult:-
i.
the
ii.
the challenge of the Sugar Regime by
iii.
the increasing pressure on the price of sugar
within the reforms of the Common Agriculture Policy;
iv.
the dismantling of MFA compounded with the
dangers of the initiative by some major developed countries for a full
liberalization of market access for non-agricultural goods (NAMA);
v.
an uncertain AGOA III; and
vi.
the increasing
competition from the SADC and COMESA region.
However,
one positive development at the international level, which will impact on the
economic strategy of
2 (b) The
Economy of
GDP growth
The
GDP growth rate, in 2003, picked up to reach 4.4% from a poor performance of
2.0% in 2002 and is expected to grow further to around 5.3% in 2004. This growth, however, excluding sugar, will
be only 4.7%.
Inflation and
Interest
The
inflation rate in 2003 has gone down to 3.9% and has reached, indeed, a very satisfactory
level. The continuing decrease in the
interest rate is also another encouraging factor.
Investment
The
low investment rate at 22.7% of GDP in 2003, with private sector’s share
declining to 61.6% (compared to 68.8% in 2002) is a matter of concern. However, it is encouraging to highlight that
private investment is expected to grow by 6.8% in 2004 and will compensate for
the decrease in the public sector investment.
Unfortunately, overall investment for 2004 is expected to decrease to
22%. This situation is very serious and
needs the full attention of all the stakeholders of the country.
Corporate Profit
The
overall level of profits has also been going down. The profit of around 40% of the top
companies in the country has decreased and for some of those companies, the
reduction has been very significant.
This factor explains, to some extent, the bad situation of the private
sector’s share in investment
Unemployment
Unemployment
continues to remain a major issue and the trend, with respect to employment
growth compared to that of labour growth rate as shown below, is not
encouraging.
Annual
Growth Rate (%)
|
|
1980-1989 |
1990-1999 |
2000-2003 |
|
Labour force |
2.5 |
2.3 |
1.3 |
|
Employment |
3.4 |
1.8 |
0.8 |
The
employment generating sectors over the last three years have been the non-EPZ
manufacturing, tourism and construction.
Unfortunately, the jobs created were insufficient to compensate for the
losses in the clothing sector.
With
a negative growth of only 2% in 2004 compared to that of 4% and 6% in previous years,
the clothing sector should start to stabilize within the next two years. However, this sector is expected, in its
restructuring process, to continue to shed jobs in the immediate future. .
As shown below, the job losses in that sector is
closely related to the overall growth rate in unemployment.
Employment
-EPZ -Textile & Clothing |
1999 91,374 80,960 |
2000 90,682 80,001 |
2001 87,607 77,003 |
2002 87,204 76,570 |
2003 77,623 67,251 |
|
% of total
employment -Textile & Clothing |
16.8 |
16.5 |
15.7 |
15.6 |
13.5 |
|
Unemployment rate % |
7.7 |
8.8 |
9.1 |
9.7 |
10.2 |
However,
it is pertinent to highlight that the clothing sector is still unable to
attract local labour and has to resort to foreign workers.
Furthermore,
the informal sector, as substantiated in a recent report by the MRC continues
to provide employment opportunities to an increasing number of workers losing
their jobs in the traditional sectors of the economy. While this alleviates the pressure in the job
market, it is not an encouraging sign in the long-term for our economy as there
is a danger of the development of a parallel economy that usually is
unregulated and could lead to various distortions of the country’s economic and
social systems.
The
budget deficit, estimated at 5.5% for 2003/2004, remains high and with the
payment of the second ‘tranche’ of PRB, the budget
situation for the next two years will become much more difficult.
Public debt
The
public debt in spite of going down from the 65% to 55.9% of GDP, is very high
and debt servicing remains one of the major components of total Government
expenditure.
Economic re-engineering
The
re-engineering of the sugar and clothing and textile sectors, through the Sugar
Sector Strategic Plan (SSSP) and Textile Emergency Support Team (TEST) with a
view to making them fully competitive in non-preferential international market
conditions is continuing. The
re-structuring of the above two industries as well as non EPZ manufacturing and
tourism sectors is one of the major challenges facing our economy at present .
The
emergence of new opportunities in the economy such as in the ICT sector,
knowledge industry, seafood hub and the further consolidation of Mauritian
companies in the region are very encouraging signs of the potential of further
diversification of the economic base of Mauritius.
2 (c) Key objectives of the 2004/2005 Budget
In the light of the issues discussed above, the JEC
considers that the key objectives of 2004/05 Budget should be as follows:-
i.
to further re-structure and
consolidate the main sectors of the economy;
ii.
to redynamise
investment opportunities;
iii.
to overhaul the business
facilitation environment; and
iv.
to
reduce the budget deficit.
3. Meeting
the key objectives of the 2004/2005 national budget
3 (a) To further re-structure and consolidate
the main sectors of the economy
The
traditional sectors (namely, sugar, textile and clothing) are facing
simultaneously, the challenges of re-structuring and difficulties of high
indebtedness. In this context,
implementing jointly such initiatives, as the SSSP and TEST are indeed useful
models.
However,
one of the major constraints in this re-engineering process has been the low
development level of our financial system, especially that of the debt
market. The JEC believes that, at this
given juncture of our economic development, it is imperative to explore ways
and means for developing an effective capital and debt market with the
possibility of facilitating the introduction of new instruments.
Capital
markets play a vital role in sophisticated economies in that they support
economic development by providing long term non-bank financial instruments for
project financing and re-structuring.
The absence of an efficient capital and debt market in
In
order to create an efficient and vibrant capital market, the following issues
should be urgently addressed:-
i.
encourage a more efficient
intermediation between providers of capital (i.e. savers and investors) and
borrowers. One of the options is to
encourage the consolidation of the financial intermediaries. Presently there exist a number of small
intermediaries who lack the financial resources as well as the skills required
to provide a comprehensive array of services competitively. It is believed that a consolidation of the
financial services sector will bring financial intermediaries that can afford
to provide a high level of services in the area of corporate finance, equity
and debt financing, mergers and acquisitions and regional project finance;
ii.
development
of a strong
institutional investors base
through their active participation in the corporate debt market, private equity
for venture capital and re-structuring; and
iii.
creation
of an integrated
financial services sector
through the further development of an active secondary
market for Government and corporate debts. One option that needs to be
encouraged is the creation and development of a short-term corporate debt
market with the institution of an active commercial paper market. In order to ensure the proper assessment of
credit risk, a Credit Rating Agency, preferably a government/private sector
joint venture is required for the credit risk assessment of corporate debt
issues.
The
launching of a secondary market for Treasury Bills goes in the right direction.
3 (b) To redynamise investment opportunities
The trend in Private Sector
investment over the past few years indicates that opportunities for large-scale
investments have become more difficult as the local and international
environment becomes more challenging.
However, another trend over the
recent past has shown that companies of rather “modest size”, across all
sectors of the economy have become important “vehicles” for employment
creation. We believe therefore, that it is necessary to complement the BOI
approach towards attracting large investments with a new approach which
attracts smaller economic players with an aim towards integrating them into the
mainstream of our economy. Such
companies, which are larger than ‘micro and handicraft’ ones, should not be
marginalised into an SME typology but should be treated as potentially
important economic players providing new dynamism in the economy through
identification of new market niches, linkages between sectors, clustering
opportunities, among other benefits.
In that respect, we would suggest
a policy change whereby all such companies be offered
a facilitation system which would support their setting up, growth, professionalisation and internationalisation.
In
that respect, we propose the launching of a ‘Special Start Up
Zone’ with ‘
i.
start-up facilitation;
ii.
business synchronization and outsourcing;
iii.
international market access; and
iv.
skills matching
The
present exercise for integrating the support institutions (EPZDA, MIDA, and
SMIDO) offers the right opportunity for creating
The
JEC, with the support of all the private sector institutions, will work closely
with
A more business friendly
environment for non-EPZ manufacturing
The
overall non-EPZ manufacturing sector of
Furthermore,
this sector which has a higher value added than the EPZ and which represents
around 10.6% of GDP has been growing at about 4% over the last three years and
contributing significantly to job creation (about 4,000 during the last three
years). However, a major obstacle facing
this sector is direct price control.
In
the light of the above, and the competitive framework set by the Competition
Act, JEC believes that it is necessary to implement urgently the already enacted
competition legislation and to remove completely direct price control.
A uniform corporate tax rate
of 15%
The
introduction of the Value Added Tax, the rationalization of customs duties, the
framework of the Companies Act 2001 and the range of more than 40 different
types of companies which benefit from a corporate tax rate of 15% are all
reasons in favour of the uniformisation of a single
15% tax regime. A single tax rate will
significantly streamline the income tax department workload and send a strong
signal to economic operators.
Introduction of Group relief
tax
We
recommend the Group Relief through our corporate tax system. This will also give companies flexibility to
start new activities through subsidiaries and contribute to a more supportive
environment for innovation and risk-taking.
Group Relief should be available to all companies in that losses of
subsidiaries can be transferred to the holding company or vice versa or even
between subsidiary companies.
Landlord and Tenant Act
The
JEC recognizes that significant progress has been made with respect to the
changes to be brought in the Landlord and Tenant Act. We believe that as a matter of urgency the
appropriate legislation has to be introduced for implementation with a view to
unlocking the property market.
Enhancing Productivity
With
the setting up of the
NPCC, Government has affirmed its determination to
promote a culture of productivity at the
national level and to achieve “a better living for all”. The thrusts of the various productivity
initiatives undertaken to make
Air Access
Policy
The
JEC would like to highlight once again, the strategic role of an effective air
access policy in the economic diversification of
In
this context, the JEC welcomes the setting up of an air access policy unit
within the Ministry of External Communications and urges Government to embark
on a capacity building exercise for this unit.
Freight Monitoring Mechanism
Our
ambition to serve as a logistics hub for the region will require excellent
infrastructure and efficient and competitive services. The recent problems encountered in the port
including the increased freight rates of containers, both
bulk or general cargo, are impacting adversely on the economy. Given that such a situation, if not attended
to, would jeopardize the development of a number of industries, Government
should give special attention to the global trends in the logistics
industry.
In
this context, the setting up of a freight monitoring mechanism, with the
participation of the private sector, to closely monitor the evolution of future
trends and identify actions to be taken should be considered a priority.
3 (c) To overhaul the business facilitation
environment
In
spite of a consensus among all stakeholders to improve the overall business
permits environment, re-engineering of all the “processes and procedures” is
still proving to be rather difficult with adverse impact on the investment and
expansion of start-ups.
In view of the above, it is felt that the various
initiatives being undertaken should be harmonized at the level of the Steering
Committee of the Ministry of Finance.
We
believe that in the light of the extensive works already undertaken, the
Steering Committee could implement the following:-
i.
to complete all necessary amendments to be
brought in the legislations, by August
2004;
ii.
to make public all the investment policy
guidelines by October 2004; and
iii.
to put “on line” all the
procedures and guidelines by the end of the year.
Transport issue
The
transport problem remains a major one with wide ranging adverse impact on the
economy. While we recognize that some
long term solutions are being explored, we would suggest, that there is a need
to explore jointly, with the major stakeholders certain short term options.
Rationalising
public expenditure and debt management
We
welcome the introduction of the Medium Term Expenditure Framework (MTEF) with a
view to allowing more efficient and effective use of public resources. The MTEF, through improved intra-sectoral allocation of resources will rationalize
expenditure and reduce the budgetary pressure.
There
is still however, an urgent need to modernise the public debt management
operations, given that debt servicing, which is 25% of recurrent expenditure,
is the second largest expenditure item.
In
this context, the setting up of a strong and high powered debt management unit
with a view to diversify debt instruments and reduce the overall cost of debt
servicing is necessary.
Encouraging PPP
projects
On
the expenditure side, the JEC would like to reiterate the urgency for
implementing the framework for PPP (Public Private Partnership) projects. The PPP instrument is the ideal tool to
maintain capital expenditure without putting pressure on the public debt and
the budget deficit.