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European Report on Development 2015 Financing and other means of implementation in the post-2015 context

Mauritius Country Illustration

Prepared by Nikhil Treebhoohun and Ram Jutliah, Oxford International Consultants Mauritius Ltd 20 June 2014

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CONTENTS

1 INTRODUCTION ..................................................................................... 3

2 THE MAURITIAN EXPERIENCE WITH ECONOMIC TRANSFORMATION ...... 5

THE ECONOMIC TRAJECTORY ................................................................................... 6

THE ECONOMY IN THE NEW MILLENNIUM ................................................................ 10

SOME ELEMENTS OF SOCIAL TRANSFORMATION ........................................................ 11

ENVIRONMENTAL IMPACT OF THE TRANSFORMATION ................................................. 15

THE BEGINNING OF A NEW CYCLE? ......................................................................... 16

3 HOW WAS THE TRANSFORMATION FINANCED? ................................... 17

4 THE ENABLERS ..................................................................................... 25

5 OTHER COMPLEMENTARY MEANS OF IMPLEMENTATION (MOI) .......... 30

6 LOOKING AHEAD ................................................................................. 34

REFERENCES ............................................................................................... 64

STATISTICAL ANNEX ................................... ERROR! BOOKMARK NOT DEFINED.

ANNEX 1: LIST OF VALIDATION WORKSHOP PARTICIPANTS ................. ERROR! BOOKMARK NOT DEFINED.

ANNEX 2: IMF ............................................................................................. 73

ANNEX 3: DEVELOPING AN ENABLING ENVIRONMENT FOR ENTERPRISES .... 74

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11 IInnttrroodduuccttiioonn

This Country Illustration (CI) of Mauritius was commissioned to inform the 2014 European Report on Development (ERD 2014) on the topic of ‘Financing and other means of implementation in the post-2015 context’. To date there has been little work that brings together the post-2015 goal-setting and financing for development agendas; the ERD 2014 aims to provide a framework for discussions on how finance might contribute to post-2015 goals through an analysis of development needs, and by highlighting sources of finance that are important for meeting post-2015 objectives in specific country contexts.

The main research question of the ERD 2014 is: ‘How can financial resources be most effectively mobilised and channelled and how can they be combined with selected enabling policies and other means of implementation, to effectively support a transformative post-2015 agenda?’ This CI on Mauritius shows how a small island developing state (SID) managed within 40 years to move from a mono-crop economy and Least Developed Country (LDC) status to become a middle-income country (MIC) with a diversified economy.

The ERD 2014 identifies the three manifestations of sustainable development transformations (SDT) as: Economic transformation – change in the composition of gross domestic product (GDP) and labour market, growth rate, export performance, etc. Social transformation – reduction in poverty rate, changes in income inequality, provisions for social protection, etc. Environmental transformation – natural resource management, use of renewable energy, green growth issues, etc. This CI places the emphasis on economic transformation, which laid the basis for sustainable social transformation and mainstreamed issues of environmental transformation. These changes involved timely policy reforms, institutional restructuring, continuous up-skilling of the labour force and upgrading of infrastructure such as roads, the port and airport, industrial estates, and waste-water management. To enhance social welfare it was necessary to develop access to essential services across the island (e.g. water, electricity, cooking gas, phone network). The government’s focus on access to free health services and education helped to reduce infant mortality, enhance literacy, improve access to secondary school education for both sexes, and provide access to tertiary and technical education. Free education also contributed to women’s emancipation, as shown by the increasing participation of women from 1976, when the policy was introduced. New job opportunities led to increased purchasing power, enabling families to address their basic needs, acquire property and access to land for residential purposes, and build cyclone-resistant concrete buildings – which are essential to people’s security on a tropical island. For the more vulnerable groups, the government provided assistance for social housing and a system of financial support.

Transformation from an agricultural to an industrial economy has, however, had a negative impact on the environment. Only 1% of the original forests survived the extensive deforestation to make way for sugar cultivation and agriculture. The negative impact on the environment was also seen when the garment sector took off in the 1980s: several dye-houses were initially set up with only minimal controls to regulate the effluents that were released into rivers or allowed to seep into the soil. Given the importance of the tourist industry, the government of Mauritius began to realise the

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need for a balanced, sustainable development model based on preserving and protecting the environment. Thus, in 2008 it launched the Maurice Ile Durable (MID) concept that aimed to promote the use of renewable energy and sustainable development. This CI explores how Mauritius has addressed the issues related to financing, the enabling policies and other means of implementation (MoI) for the transformations achieved in the past 40 years. The future challenge is to enhance resilience and adapt to the constantly evolving economic environment while promoting social and environmental development. The CI is based on a review and analysis of trends, empirical evidence and reports on the economic transformation of Mauritius as well as a brainstorming session with the main actors in this transformation process. The CI also included a Validation Workshop (VW) with local stakeholders and actors in the transformation process. (See Annex 1.)

Following this Introduction, Section 2 presents the Mauritian experience of economic transformation. Section 3 explains the financing options previously used and the composition of financial flows. Section 4 addresses how the enablers, namely factors of production, technology, governance, and global linkages, have been important for the transformations in Mauritius. Section 5 identifies the complementary MoI that have been useful in mobilising finance and using finance more effectively for transformation. Section 6 concludes with a discussion of the future priorities and implications for financing options from 2015 to 2030.

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2 Mauritia’s Experience of Economic Transformation Mauritius is an island with an area of 1,865 km2 (and a maritime zone of some 2 million km2) situated in the South West Indian Ocean, far from its major markets and suppliers. Inhabited only since the 18th century, the island was a French colony for almost a century until the British conquest of 1810, because of its strategic importance on the route to India. The British made it a mono-crop economy based on sugar cane. Since the French era, slaves had been imported from neighbouring Madagascar, Mozambique and Senegal. With the abolition of slavery, indentured labourers were brought in from India and a small minority from China. Thus, by the end of the 19th century, Mauritius was already a multi-ethnic society. It is today a veritable melting pot of European, African and Asian cultures with a population of 1.3 million.

At independence in March 1968 Mauritius was a textbook example of a mono-crop economy. It had no mineral resources, no entrepôt trade, and, except for sugar refining and its immediate by-products, few manufacturing enterprises. Moving from an alarming situation at independence (a nominal per capita income of about US$260, an unemployment rate around 17%, and total dependence on sugar exports), Mauritius underwent major structural transformations to attain a nominal per capita income in 2012 of US$8,890. As early as 1975 it graduated from the International Development Association (IDA), which provides soft loans to the poorest countries.

The major transformations over the last 40 years can be summed up as follows: (a) at the national level – shortly before independence – Mauritius embarked on an import-substitution industrialisation strategy aimed at developing a local class of entrepreneurs to diversify from sugar, and this was complemented from 1970 by an export-oriented industrialisation strategy based on Export Processing Zones (EPZ); eventually in the late 1970s it had to embark on a structural adjustment programme (SAP) to ensure policy coherence and to become fully outward-looking while establishing the necessary institutional framework to ensure effective implementation; (b) at industry level – as the World Trade Organization (WTO) era began to put an end to protectionism, the sugar industry faced the prospect of losing its guaranteed quota and thus had to restructure to ensure its survival; similarly the textile and garment industry had to move from producing low value-added products dependent on competitive labour costs to producing higher value-added products.

Success is often measured in terms of economic growth and an increase in per capita income. To be successful, however, transformation depends on various elements. The impact on poverty and on the environment has also to be included, although it is a moot point whether positive social or environmental change can take place without economic structural transformation. Furthermore, as the case of Mauritius illustrates, transformation is a never-ending process – timely policy reforms, institutional restructuring, continuous up-skilling of the labour force and upgrading of the infrastructure are required to maintain the momentum of growth.

The main aim of this Country Illustration is to explore how different phases of economic structural transformation were financed and what were the sources of financing: local (tax, borrowing), international (grants, Official Development Assistance (ODA), loans), public and private. For ease of analysis the trajectory has been broken down into phases. There is greater emphasis on the SAP phase because this facilitated the subsequent diversification.

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The economic trajectory

Figure 2.1 sums up the structural transformation of Mauritius from a mono-crop economy to an integrated business platform in which services exports are gaining importance. There have been different phases:

Breaking the dependence on sugar (1970–79)

Developing export-oriented industrialisation, specifically the textile and garment sector (1980–92)

Laying the foundations for the growth of a services economy (1990–2012);

Looking to the sea (2013)

Figure 2.1: The economic trajectory of Mauritius

Source: Makoond, 2011

Annual growth averaged 5% in the 1980s following the SAP, and fell to 4% in the 1990s. As from 2000 the average growth rate has been around 3.5%.

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Figure 2.2: GDP growth rate 1970–2013

Source: Statistics Mauritius, various issues

Breaking the dependence on sugar (1970–1979): The first phase started after independence and was aimed at diversifying the economy to reduce the vulnerability caused by the over-dependence on sugar for jobs and export earnings. As can be seen in Table 2.2 the contribution of agriculture to GDP fell from 26.1% in 1970 to 15.7% in 1982. By 1998 its share was less than 10% while manufacturing had risen to 20.5%. While the agricultural sector, which was highly labour intensive and regulated by strict labour laws, maintained its level of employment at above 50,000 (declining by some 3,000 between 1970 and 1982), the number of employees in the manufacturing sector almost trebled during that period. By the end of the second phase, the manufacturing sector had become the largest employer, with the EPZ creating the lion’s share of jobs.

Table 2.3: Structural transformation of Mauritius 1970–1998 (US$ bn, %)

Amounts (US$ bn) Growth rates (%)

Economic Parameters 1970 1982 1998 70-82 83-98 70-98

Nominal GDP and GDP growth pa ($bn)

0.42 0.95 4.45 1.52 19.1 17.2

Real GDP (1970$) ($bn) 0.42 0.78 2.25 GDP growth

3.2 5.9 5.1

GNP growth

-4.8 6.4 2.1

Population (mn) 0.73 0.92 1.10 2.2 1.1 1.4

GNP/capita (nominal)($000) 0.57 1.03 4.05 Real growth -6.3 5.4 2.0

Share (%)

Agriculture as % of GDP 26.1 15.7 8.8 Real growth

-1.3 -0.6 -0.7

Manufacturing as % of GDP 12.0 20.1 25.2 Real growth

4.5 7.4 6.0

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Other industry as % of GDP 8.1 9.0 9.9 Real growth

1.1 1.2 1.5

Services as % of GDP 53.8 55.2 57.9 4.5 6.6 5.8

Sources: Bank of Mauritius annual reports; World Bank Country Economic Reports; World Bank Global Development Finance Reports, 1998, 1999; and World Development Indicators 1998, 1999

Table 2.4 EPZ Contribution to GDP, employment, and investment (selected years)

1976 1980 1990 2000 2010 2012

Contribution in GDP (%) 2.59 4.34 11.87 11.43 6.47 6.2%

Employment (number) 644 21,344 89,906 90,682 55,828 54,597

Investment (Rs million) 38 630 1,702 913 1,066

Source: Statistics Mauritius, various issues

The island’s export performance was quite remarkable. In 1968, sugar and its by-products made up more than 90% of total exports. Between 1970 and 1976, total export earnings, starting from a low base, grew by an average of 31% per year. The rate for the period 1976–1982 was 16% per year, averaging 22% per year between 1983 and 1990. Merchandise exports totalled only Rs 361.7 million in 1971 when the first EPZ firms started operating. In 1990 they reached Rs 18,246 million, a nearly 50-fold increase in 20 years, while sugar accounted for only 32% of the total. In fact, in gross terms, manufacturing brought in more foreign earnings than sugar for the first time in 1985. The composition of exports underwent a major change as manufactured exports, especially textiles, gained in importance.

Table 2.5: Total exports (excluding ship’s stores and bunkers): 1970, 1980 ,1990, 2000, 2010 and 2013

SITC SECTION/DESCRIPTION

F.o.b Value: US$ Million

1970 1980 1990 2000 2010 2013

Total exports 12.83 111.37 608.20 1302.40 2066.33 2398.90

Of which EPZ/EOE 0.00 29.80 382.47 1032.03 1387.40 1561.70

Main exports

Cane Sugar 11.3667 72.27 173.73 184.80 256.93 316.10

Fish and fish preparations NA 1.40 5.37 32.07 339.40 486.90

Textile yarn, fabrics, made up articles NA 1.93 19.80 71.03 81.07 116.23

Articles of apparel & clothing accessories NA 18.87 306.40 826.00 798.03 780.77 Source: Statistics Mauritius, various issues

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Table 2.6: A picture of Mauritian economic performance and change 1970–1998 (US $bn and %)

Economic parameters

1970

1982

1998

2012

Period – averages for

70 - 82 83 – 98 70 - 98

Investment as a % of GDP 22.4% 24.0% 28.5% 23.0% 21.1% 28.5 24.0%

Savings as a % of GDP 24.1% 21.5% 24.0% 15.1% 19.3% 23.6% 21.0%

Inflation (CPI) 4.2% 14.5% 7.1% 5.1% 11.0% 7.2% 9.0%

Overall Budget Deficit -2.5% -8.1% -1.0% -1.8% -2.5% -3.5% -2.9%

Exports as % of GDP 54.2% 53.5% 59.6% 46.81% 53.8% 57.6% 55.2%

Imports as % of GDP 55.6% 57.3% 65.4% 23.37% 56.1% 61.8% 58.7%

Current account balance /GDP 2.0% -5.8% -2.6% -10.34% -3.1% -3.4% -3.2%

External Debt 5.0% 69.1% 55.5% 10.5% 30.3% 58.3% 46.5%

Average Annual Real Growth Rates

Exports ($bn) 0.32 0.49 2.65 2.67 3.9% 7.7% 5.3%

Imports ($bn) 0.37 0.54 2.91 5.36 -2.1% 8.5% 6.1%

Sources: Bank of Mauritius annual reports; World Bank Country Economic Reports; World Bank Global Development Finance Reports 1998, 1999; World Development Indicators 1998, 1999

Promoting export-oriented industrialisation (1980–1992): It is doubtful whether the restructuring of the sugar and textile industries would have taken place without the structural adjustment programme (SAP) in the early 1980s, which put in place a set of policies that provided the required stimulus to investment and savings. Growth was not smooth. Mistakes were made, corrective action taken, and policies going against the economic orthodoxy were adopted under certain circumstances that, luckily, did not create major insurmountable distortions in the short run.

Following the adoption of the SAPs in 1979 and 1982, the country was back on a steady growth path. Growth rates picked up as from 1984 (Table 2.3) and by 1990 the unemployment rate was less than 2% with the manufacturing sector being the main employer (Table 2.6).

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Table 2.7: Employment by economic activity (in thousands)

1981 1984 1986 1988 1990 2012

Primary sector 53.5 49.8 46.9 45 47.8 14.8

o/w Sugar 47.3 44.6 41.7 39.7 39.9 7.4

Manufacturing 36.9 42.1 76.5 105.8 109.7 73.3

Construction 7.3 4 5 9.4 10.9 16.1

Wholesale, hotels 9.1 8.9 9.6 12.8 16.5

25.1

Services 54.6 54.8 54.9 55.3 66.3 80.4

o/w Government

Other 19.8 18.7 17.7 21.7 12.9 87.8

Total 193.5 190.7 223.2 264 277.2 304.9

Source: Statistics Mauritius, various issues

Laying the foundations for a service-based economy: New threats to the sustained growth of the Mauritian economy emerged by the beginning of the 1990s: in addition to labour shortages (both in numbers and skills), the dismantling of the Multi-Fibre Arrangement (MFA) and the establishment of the WTO would increase the competition for the textile industry as both were geared to the removal of protectionist barriers. A strategy for the consolidation and modernisation of existing industries through technology and productivity enhancement was defined, and institutions were set up, namely the Export Processing Zones Development Authority (EPZDA) to provide support for export-oriented enterprises to restructure, the Mauritius Offshore Business Activities Authority (MOBAA) to promote the development of financial services, and the Mauritius Freeport Authority to promote trans-shipment from Mauritius.

TThhee eeccoonnoommyy iinn tthhee nneeww mmiilllleennnniiuumm

Mauritius embarked on a new transformation phase in 2000 with the promotion of the service sectors and the opening up of the economy to foreign talents and skills. The new areas that have been identified are the ‘blue’ economy, i.e. the 2 million km maritime zone – and the ‘green’ economy, i.e. environmental sustainability. How these will be achieved has yet to be defined.

Two new service sectors have grown in importance since 2000: Information and Communications Technology (ICT) and financial services. Whereas ICT contributed only 4.1% to GDP and employed 4,360 in 2000, by 2010 it represented 6.5% of GDP. More importantly from the social transformation angle it had created 12,826 jobs by 2010, an increase of some 8,000. Similarly the financial services sector created some 5,000 additional jobs up from 6,715 in 2000. The opening up of the economy to foreign expertise seems to be bearing fruit.

Success will eventually depend on the extent to which the new vision is internalised by the population as a whole and on the ability of the various drivers of the economy (especially the regulators) to create the right environment to attract foreign direct investment (FDI).

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As noted, the engines of growth of the Mauritian economy had been, at different periods, sugar, textiles, to a lesser extent tourism, and offshore financial services. But by 2000 these were showing signs of running out of steam. While sugar’s contribution to the national economy in terms of both job creation and value-added had been declining since the 1980s, garment manufacturing also underwent a downturn. The key challenge confronting Mauritius at the end of the 1990s was ironically the same one it faced at independence in 1968 and again in 1980: namely, how to reduce unemployment, which stood at 10.2% in 2003 and had been increasing steadily from the end of the previous decade.

The stark choice facing Mauritius (as identified in 2004 when the National Productivity and Competitiveness Council organised a Competitiveness Foresight Exercise to reflect on the future orientations of the economy) was either to continue with the economic agenda that had been put in place under the SAP or to choose a new economic trajectory that would lead to an average annual growth rate of 7% to 8%. This document was to influence the reforms undertaken in 2005/2006.

The economy of Mauritius was by then giving several signs of approaching distress, i.e. slowing growth, growing unemployment, a widening fiscal deficit, increasing internal and external public indebtedness, growing bureaucratic inefficiencies, relatively uncompetitive domestic private enterprises, and an increasing welfare cost burden – all pointing to the clear unsustainability of the strategy of depending on sugar, the garment industry, tourism and financial services. Exacerbating these internal distress signals was the fast-evolving international context with new rules and players entering the scene: the end of quotas and preferences, a trading regime that was increasingly WTO-ruled, intense competition in traditional sectors from other low-cost economies, (e.g. large economies such as China and India, with their own massive domestic markets to sustain their industrial engines, as well as smaller but competitive ones like Bangladesh, Sri Lanka and Vietnam), the failure of regionalism to provide Mauritius with growth options (although possibly providing options for Mauritian firms to invest elsewhere in the region), increasing economic globalisation, especially of finance and trade, and the growth of business process outsourcing (BPO) made possible by rapid ICT developments in the global reorganisation and redistribution of economic activity.

SSoommee eelleemmeennttss ooff ssoocciiaall ttrraannssffoorrmmaattiioonn

Income distribution: Table 2.8 below, taken from the Household Budget Survey of 2006/07, shows that following the SAPs of 1979–1982, income inequality fell as the median monthly household income rose from Rs 1,518 in 1980/81 to Rs 5,300 in 1991/92, and Rs 14,640 in 2001/02. During the same period the Gini coefficient fell from 0.445 to 0.388. While the average monthly household disposable income increased by 22.3% in real terms between 2006/07 and 2012, the median monthly household disposable income increased by 48.8% from Rs14, 640 in 2006/07 to Rs 21,790 in 2012. However, income inequality increased between 2006/07 and 2012 as the share of total income going to the 20% of households at the lower end of the income range fell from 6.1% in 2006/07 to 5.4% in 2012. On the other hand, the share of the upper 20% of households increased from 45.6% to 47.4%. The rise in income inequality is confirmed by an increase in the Gini coefficient from 0.388 in 2006/07 to 0.413 in 2012.

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Table 2.8: Selected measures of monthly household income, Household Budget Survey 1975, 1980/81, 1991/92, 1996/97, 2001/02 and 2006/07

Source: Statistics Mauritius, Household Budget Survey 2006-07

Table 2.9. Poverty and income distribution 2001/2002 2006/2007 2012

Gini Coefficient 0.371 0.388 0.413

Percentage of total household income accruing to

Lowest 20% of households 6.4 6.1 5.4

Highest 20% of households 44.0 45.6 47.4

Poverty Line: Half median monthly income per adult equivalent

Rs 2,804 Rs 3,821 Rs 5,660

Proportion of poor households (%) 7.7 7.9 9.4

Estimated number of poor households 23,700 26,400 33,800

Source: Statistics Mauritius, various issues

It is clear that the income distribution worsened between 2001/02 and 2006/07 as the economy grew at a slower pace (4% on average compared to 5–6% in the previous decade) and unemployment, which was at less than 2% in 1990, had risen to 9.1% in 2006 fell only slightly to 8.7% in 2012.

Table 2.10: Unemployment rate for selected years

Year 1994 1998 2002 2006 2010 2011 2012

Unemployment rate (%)

4.5 6.9 7.2 9.1 7.7 7.9 8.7

Source: Statistics Mauritius, various issues

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Table 2.11: Annual GDP growth rates 2000–2010 (in percentage terms)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Annual real growth rate of : Gross Domestic Product (GDP) at basic prices

+10.2 +4.6 +1.6 +6.3 +4.3 +2.7 +5.6 +5.7 +5.5 +3.1 +4.2

+3.6

+3.2

exclusive of sugar +8.4 +4.3 +3.0 +6.4 +4.0 +3.2 +6.0 +6.4 +5.5 +2.9 +4.4

+3.5

+3.3

Source: Statistics Mauritius

Figure 2.3: Lorenz Curve, 2001/02 and 2006/07, Household Budget Survey

Source: Statistics Mauritius

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Table 2.12: Share of income owned by the top 1%, worldwide

Source: Alvaredo et al., The World Top Incomes Database

Figure 2.4: Evolution of Top 6% income shares in Mauritius and comparator countries

Source: Alvaredo et al., The World Top Incomes Database

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Gender Equality: The provision of free secondary education from 1976 resulted in an increase in the number of women with the knowledge and skills to join the labour force. As the EPZ firms (especially the garment sector) needed more labour, a larger number of women joined this sector, as can be seen from Table 2.13.

Table 2.13: Ratio of male and female employment in large EPZ establishments

1975 1980 1990 2012

Male Female Total Male Female Total Male Female Total Male Female Total

TOTAL 129,074 35,390 164,464 179,180 17,417 196,597 179,180 98,375 277,555

191,374

113,563

304,937

Male/female ratio 78.5 21.5 100.0 64.6 100.0 64.6 35.4 100.0

62.1

37.9 100.0

Source: Statistics Mauritius

EEnnvviirroonnmmeennttaall iimmppaacctt ooff tthhee ttrraannssffoorrmmaattiioonn

The natural environment has been affected by the development imperative of Mauritius. While initially the clearing of natural forests was to make way for sugar cane and agriculture, with population growth and infrastructural requirements forests also had to be cleared to provide for housing, industrial buildings, road networks etc. Deforestation continued until the mid-1970s (e.g. through a post-independence job-creation programme funded by the World Bank). With forests both inland and in the coastal regions having been cleared, a wide variety of fauna and flora is threatened. Today the total forested area is less than 5% of the original, which is degraded to varying degrees. Table 2.14 illustrates the changes in environmental indicators.

In 2008 the government launched the Maurice Ile Durable (MID) concept to promote renewable energy and sustainable development. Sustainable solid-waste management and the use of compost in agricultural fields are also being encouraged.

Table 2.14: Changes in environmental indicators

Source: Statistics Mauritius

Environmental Indicators 2001 2010

Forest area (as % of land area) 30.4 25.3

CO2 emissions (metric tons per capita) 2.2 2.8

Improved water source (% of population with access) 99 100

Mean catch per fishermen per day (kg) 4.5 6.5

Daily per capita domestic water consumption (litres) 158 160

Daily per capita solid waste generation (kg estimate) 0.7 0.9

Threatened plant species (IUCN Red list) - 88

Threatened animal species (IUCN Red list) - 65

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The last decade has shown the importance of energy prices in the country’s development. The increasing fuel cost has led Mauritius, which is a net fuel importer, to review the issue of energy use and management. The government has launched numerous initiatives to improve the energy efficiency of local industries through funding technological assistance and eco-friendly and green initiatives.

Table 2.15: Changes in energy indicators

2010 2013

Population (000) 1,250 1,259

Annual increase in energy requirement +6.2 +1.9

Total electricity Generated (GWH) 2,689 2,885

Electricity from renewable sources (%) 21.5 20.6

Import dependency (%) 83.1 84.9 Source: Statistics Mauritius

Accordingly, there remain challenges on the development front in terms of the ability to embark on new growth sectors, on social front in order to ensure the economic integration of vulnerable groups, and at the level of the environment for greater protection and more sustainable use of energy.

TThhee bbeeggiinnnniinngg ooff aa nneeww ccyyccllee??

This section has described the successive transformations of the economic structure of Mauritius from the 1960s, when sugar was the only industry. At independence there was a deliberate policy to develop local industrialists, and to promote export-oriented industrialisation and the tourism sector. The political and economic situation in 1975 compelled the government to adopt a SAP, overseen by the World Bank. This brought changes in policies and institutional development that took Mauritius onto a higher growth path, which effectively led to the structural transformation with the manufacturing sector overtaking sugar as the main pillar of the economy. The Mauritian economy has started to slow down since 2010 as a result of the global recession, which led to weak sugar and textile exports, a decline in the construction sector and lower margins in the tourism sector. Although the ITC and financial services continued to grow, they were unable to absorb the unemployment generated from the traditional economic sectors. As a result, unemployment has risen to 8%, putting additional pressure on the government to finance enterprise-restructuring efforts, and to finance for Temporary Unemployment Benefit (TUB) and a youth employment programme to facilitate their integration into new growth sectors. Mauritius always strived to maintain a welfare state, providing safety nets to vulnerable sectors of the population in terms of free access to education, health services, subsidised housing, and subsidies on rice and flour. Economic growth has translated into an improvement in the quality of life in terms of access to basic utilities (water and electricity), better public infrastructure (schools, hospitals, roads, highways, modernisation of the port and airport), access to concrete housing (following an increase in purchasing power), better lifestyle through access to imported products (foods, household electronics, cars, etc.) The Education for All policy has also led to a reduction in inequality and to gender mainstreaming. The development imperative has been at a clear cost to the environment (costal development pressure, claiming of land for road construction, industrial pollution and an increase in waste), leading to more controls on industrial initiatives (e.g. Environmental Impact Assessments (EIA) of development projects) and the development of the MID in 2008 to promote renewable energy, energy efficiency and sustainable development.

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3 How was the Transformation Financed? First, it is important to note that financing the transformation has not been a major constraint in Mauritius. When grants and ODA have not been forthcoming, the government and private sector have been able to mobilise resources either locally or by borrowing on the international markets. In fact, easy access to Euro-Dollar loans in the 1970s led to an increase in public debt, deteriorating balance of payments (BoP), and depletion of foreign exchange reserves. In the early 1960s Meade (1961) identified scarcity of capital as one of the major constraints that Mauritius would face in its bid to reduce its dependence on sugar. Furthermore, since the exports of sugar benefited a small group of millers and sugar planters who were guaranteed a market and did not have to compete on the international market, they had no incentive to change. Meade therefore advocated the imposition of an export duty on sugar, which served to fill the government coffers for infrastructure development. Initially fixed at a flat rate of 5% it was increased over time to 23.6% before being reduced to 18.8% in 1989 and eventually removed. But it also served the purpose of channelling private capital from sugar to tourism and the textile industry. Indeed, the Mauritius Sugar Syndicate, which was the sole exporter of sugar, had to repatriate all its proceeds to Mauritius. This provided the banking sector with liquidity and foreign exchange for the imports of goods and equipment. In order to ensure that funds were directed to productive sectors, the central bank imposed credit ceilings for different categories – preferential rates were provided to import-substituting industries, EPZ firms and operators in the tourism sector. Interest rates were liberalised following the SAP and foreign-exchange control was totally removed in 1994. Tax incentive systems (tax holidays, duty-free imports of equipment and inputs, tax-free dividends) also supported the development of the new sectors.

This section reviews how the different phases of development were financed, using the ERD 2014 template.

Table 3.1: Sources of Finance Domestic Public Tax revenues

Domestic Private Lending and equity markets

International Public Aid (ODA and OOF)

International Private FDI, private transfers (remittances), portfolio and equity short term flows, bank lending

: : :

:

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Domestic public financing Domestic public finance has essentially been sourced from tax revenue (around 88% of total) with revenue from investments and dividends from public companies contributing around 9–10%, and grants less than 3%. In the 1970–1984 period, Mauritius had one of the highest marginal tax rates at 70-75%. In addition, there were indirect taxes such as the export duty on sugar.

Import duties represented the most important source of revenue in the 1972–1980 period. These increased from 30.3% to 39.7% in the 1981–1990 period and fell to 20.3% between 2001 and 2008. Export duties experienced a similar trend, decreasing from 12.1% between 1972 and 1980 to nil as the economic importance of the sugar sector decreased and the government’s fiscal policy changed with the application of the SAP. While taxes on goods and services made up only 17.6% of total revenue in the early phase of development, their contribution grew to 46.8% in between 2001 and 2008. This indicates the importance of indirect taxes picking up as the economy started to grow. The government also derives income from non-tax revenue, which covers property income, fees and charges, non-industrial sales, fines, etc. These amounted to 8.7% in the initial period to reach 9.9% of total revenue by 2001–2008 (see Table 3.2).

Table 3.2: Total government revenue and grants 1972–2008 (%)

1972-1980 1981-1990 1991-2000 2001-2008

Tax revenue (of which) 90.3 88.3 88.5 88.2

Domestic taxes on goods and services 17.6 21.7 32.1 46.8

Import duties 30.3 39.7 35.4 20.3

Export duties 12.1 10.5 3.5 0

Non-tax revenue 8.7 8.4 10.5 9.9

Grants 0.9 2.8 1 1.2 Source: Statistics Mauritius

The above pattern shows how, as an LDC, Mauritius initially relied on import and export duties for financing purposes. As growth picked up, consumption taxes became a more important source of government revenue, but were used to cover only current public expenditure. To finance capital expenditure, the government relied on loans (domestic and foreign) see Table 3.3.

Public domestic loans – local banks

As shown above, from independence to 1974 capital expenditure was financed mainly from domestic resources. Moreover, ODA was not forthcoming from 1977 to 198 because of the global recession. This led the Mauritian authorities to borrow on the Euro-Dollar market at commercial rates in the belief that the recession would be short-lived.

Table 3.3 Budget deficit and its financing, 1968–1986 (million rupees, current)

Year Net foreign Capital (a)

Borrowing from local banks(b)

Budget Deficit(c)

1968 13 18 0·65

1969 24 1 -42

1970 22 11 0·56

19

1971 10 59 0·75

1972 32 27 0·75

1973 11 0·15 0·72

1974 30 190 0·210

1975 41 0·9 0·145

1976 20 236 0·160

1977 70 289 -400

1978 284 464 0·553

1979 310 490 0·718

1980 219 500 0·559

1981 721 454 0·895

1982 866 594 -1115 1983 ·152 946 0·780

1984 ·88 643 0·673

1985 883 -325 0·881

1986 119 272 0·607

Source: Gulhati and Nallari, 1990

Notes: a) Net Foreign Capital includes grants, borrowing from foreign governments, international development institutions, and other foreign borrowing (see line DIII of IMF, Government Finance Statistics Yearbook). b) Borrowing from local banks is total government borrowing from deposit money banks and monetary authorities of central government. It is on a net basis. c) Budget Deficit is computed as total expenditure - Current revenue (excluding grants).

Domestic resource mobilisation became once again the main source of funding between 1990 and 1999 as local financial resources were available. Net ODA as well as net inflows of FDI represented on average less than 1% of GNI and GDP respectively. Remittances represented only about 3% of GDP. But private-sector borrowing increased from 33% in 1990 to 57.1% in 1999 (see Table 3.4).

Table 3.4 Net ODA, FDI, and private-sector credit, 1990–1999

1990 1995 1996 1997 1998 1999

Net ODA (% GNI)

3.3

0.5

0.4

1.0

0.9

0.9

FDI, net inflows (% GDP)

1.5

0.4

0.8

1.3

0.2

1.1

Domestic credit to private sector (% GDP)

33.0

47.0

43.4

49.0

56.4

57.1

Source: Statistics Mauritius

Since 2000 the Mauritian economy has been growing at an average rate of 3.5% per annum. Except for the period from 2007 to 2010, when private international finance peaked at US$8 million (possibly due to investment in real estate as part of the Integrated Resort Schemes and possibly to

20

international flows in the Global Business Sector), the financing of infrastructure projects and economic restructuring has been from public domestic and international sources (Table 3.5).

Table3.5 Government debt financing by source (1979/80 to 1984/85)

1979/80 1980/81 1981/82 1982/83 1983/84 1984/85

Domestic financing 679.4 586.1 590.9 1,335.10 997.8 106.6

Domestic financing (% of total) 75.8% 45.3% 42.6% 115.1% 116.4% 12.9%

Foreign financing 217.2 707.2 797.5 -175 -140.6 717.4

Foreign financing (% of total) 24.2% 54.7% 57.4% -15.1% -16.4% 87.1%

DFIs 79.6 77.8 280.8 125.1 294.6 372.8

Foreign governments 54.7 236.2 189.2 -105.9 106.7 172.8

Other 84.2 387 324.1 -195.2 -541.3 175.2

TOTAL 896.6 1,293.30 1,388.40 1,160.10 857.2 824

Source: Statistics Mauritius

International public finance

International public finance is made up of ODA in the form of grants and soft loans. As shown in Table 3.2, grants have not been a major source of financing – never exceeding 3% of government revenue. They did, however, play an important role in facilitating the restructuring of the sugar sector (Table 3.7). The EU grants are directed towards economic restructuring as part of the multi-annual indicative programme for Mauritius under the aegis of ‘Accompanying measures for Sugar Protocol countries’. The disbursements are made as sector budget support in the context of a Multi-Annual Adaptation Strategy (MAAS). As mentioned earlier, this reform programme was initiated in 2006 as Mauritius realised that the old drivers of growth were stuttering and a new economic approach had to be fashioned. The programme, which aims to facilitate structural change and economic diversification, benefits from the support of the EU, the World Bank, the African Development Bank (AfDB), the United Nations Development Programme (UNDP), and the Agence française de développement (AFD). The value of such assistance, though small within the context of total financing needs for infrastructural development, lies in the fact that it provides vital technical assistance to compensate for the skills gaps in the country. This approach (General Budget Support – GBS) has also been appreciated by the donors as mentioned in the lessons learnt section from the report published by the EU on its website:

GBS as an aid delivery method has proven very appropriate as it enhanced the overall quality of EU-Mauritius cooperation and the corresponding dialogue ever since it began to be used. It has promoted ownership by the government of Mauritius, enhanced alignment, increased harmonisation and facilitated mutual accountability. Beyond the restructuring of the sugar sector, GBS in Mauritius has made parallel contributions to the country’s economic reform programme, which in turn has led to a more diversified and competitive economy.

ODA represented less than 10% of GDP in the early development of Mauritius (Table 3.6). Although it increased gradually to reach about 15% of GDP it was not sufficient to meet investment needs

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after 1976 when the government embarked on a programme to improve the education and health sectors, while at the same time investing in infrastructure. The government had recourse to borrowing on the Euro-Dollar market at commercial rates. External conditions (recession in its main markets, a second oil shock in 1979) led to a worsening of its current account balance. It had to seek the assistance of the International Monetary Fund (IMF) in the form of Stand-by Agreements as well as Structural Adjustment loans (SAL) from the World Bank. It also received other bilateral loans. The importance of the SAL cannot be overstated, not because of the amounts involved but because of the rigour it imposed on policy-makers in the management of the economy and in carrying out structural reforms. As can be seen from Table 3.8, loans from the development finance institutions (DFIs) increased substantially during the SAP phase (1979–1984).

Table 3.6 Balance of Payment (BoP) indicators, 1970–1986 (% of GDP)

Year Current account Balance Net capital Net IMF Net ODA

1970 3.9% 0.5% 0% 3%

1971 -2.7% 0.1% 0% 4.5%

1972 7.8% 0.9% 0% 4.5%

1973 0.2% 1.6% 0% 7%

1974 27.2% 3% 0% 12.5%

1975 8.9% 4.7% 0% 14.5%

1976 -18.2% 4.8% 0% 14.5%

1977 -39.4% 8.3% 0% 11%

1978 -59.4% 40% 5.5% 22%

1979 -74.3% 33.5% 0% 16%

1980 -59.4% 35.8% 23% 16.5%

1981 -76.7% 25% 33.5% 29%

1982 -21.1% 24.9% 12.5% 24%

1983 -11.1% -9.8% 7.5% 20.5%

1984 -27.0% 20.9% -3.5% 18%

1985 -15.2% 12.8% -6.5% 14.5%

1986 50.9% 14.7% -9.5% 28%

Source: computed from IMF, International Finance Statistics Yearbook and OECD, various years

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Table 3.7 Government tax revenue and grants (Rs million)

Source: Statistics Mauritius and Ministry of Finance and Economic Development

Table 3.8: Government financing of capital budget 1972–1982 (Rs million, %)

Source: Based on Statistics Mauritius data

Domestic private finance

The private sector in Mauritius has relied heavily on the banking sector to finance its investment requirements. Before the SAP there was a system of credit rationing whereby priority sectors (namely EPZ, manufacturing and tourism) could have access to credit at a discounted rate. With the SAP, interest rates were liberalised and a Stock Exchange was established in 1989. A tax incentive (25% corporate tax instead of 35%) was provided for enterprises to be listed. As Figure 3.8 indicates, however, recourse to bank lending still increased significantly during the 1990s.

Table 3.9: Foreign Direct Investment in Mauritius by sector: 1990–2004 (Rs million, %)

2007/2008 2008/09 Jul-Dec 2009 2010 2011 2012

Tax revenue (Rs Million) 47,831 52,333 27,641 55,209 59,180 64,919

Tax revenue as % of GDP 18.4% 18.8% 18.7% 18.5% 18.3% 18.9%

External grants (Rs Million) 454 2,781 3,182 1,991 2,344 2,398

of which EU Grants for Economic Restructuring - 1,407 1,358 1,163 1,364 1,611

External grants as % of GDP 0.20% 1.0% 2.10% 0.7% 0.7% 0.7%

of which EU Grants for Economic Restructuring 0.5% 0.9% 0.4% 0.4% 0.5%

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Source: Bank of Mauritius reports, various issues

Figure 3.8: Sector-wise distribution of credit to the private sector

Source: Bank of Mauritius Report, 1998–1999

International private finance

Mauritius pursues an open and liberal investment policy, which encourages FDI in various economic sectors. The sustained policies aimed at economic diversification, liberalisation, and export promotion and orientation, supported by the country’s political stability and versatile labour force

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

EPZ 130 203 92 41 245 50 0 27 300 8 3 41 77 248

Tourism 68 8 152 129 70 35 20 75 27 10 0 100 103 121

Banking 51 3 0 0 0 55 1122 117 215 0 600 316 1301 310

Telecom 0 0 0 0 0 0 0 0 0 7204 0 0 0 38

Other 48 16 27 190 10 517 22 73 701 43 333 522 485 1079

Total 297 230 271 360 325 657 1164 292 1243 7265 936 979 1966 1796

EPZ 43.8% 88.3% 33.9% 11.4% 75.4% 7.6% 0.0% 9.2% 24.1% 0.1% 0.3% 4.2% 3.9% 13.8%

Tourism 22.9% 3.5% 56.1% 35.8% 21.5% 5.3% 1.7% 25.7% 2.2% 0.1% 0.0% 10.2% 5.2% 6.7%

Banking 17.2% 1.3% 0.0% 0.0% 0.0% 8.4% 96.4% 40.1% 17.3% 0.0% 64.1% 32.3% 66.2% 17.3%

Telecom 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 99.2% 0.0% 0.0% 0.0% 2.1%

Other 16.2% 7.0% 10.0% 52.8% 3.1% 78.7% 1.9% 25.0% 56.4% 0.6% 35.6% 53.3% 24.7% 60.1%

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(bilingual French- and English-speaking), have remained important assets in attracting foreign investment.

Between 1991 and 2004, FDI in Mauritius increased from Rs 297 m to Rs 1,796 m, representing a six-fold increase. Table 3.9 depicts the evolution of FDI as the economy of Mauritius diversified from manufacturing (EPZ-dominated) to become service-based. The mobility of FDI in new sectors illustrates the efforts to diversify the economy in the face of the phasing out of trade preferences, such as the MFA.

Figure 3.9: Foreign Direct Investment in Mauritius by sector, 2006–2013 (in percentage terms)

Since 2006, tourism and the financial sector have attracted the most FDI, representing respectively 19% and 23% of the total. The development of the financial sector has been boosted by the promulgation of the Banking Act 2004 (which eliminated the distinction between offshore and onshore) and the Financial Services Act 2007, allowing for the setting up of Global Business Licence companies. These reforms led to several international banks such as Standard Bank, Standard Chartered Bank, and Deutsche Bank setting up in Mauritius while others had to bring in more capital as the Central Bank increased the capital adequacy ratio. Indeed, while there were only 13 banks in Mauritius in the 1990s, today there are 21.

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The real-estate sector has been picking up sharply since 2006, from 23.55% to 62.28% of total FDI. This evolution is attributed to changes to the legislation, allowing foreigners to purchase property in Mauritius. In 2002 the government decided to open the market to foreign buyers on a restricted basis through the Integrated Resort Scheme (IRS), which permits the construction and sale of luxury villas to foreigners in particular locations. The IRS was launched in 2005, since when some 500 villas have been sold for at least US$ 500,000 each. The importance of real-estate activities as a means to attract FDI is expected to increase further with the introduction of the Real Estate Scheme (RES), a slimmed-down version of the IRS, aimed at encouraging smaller land-owners to have a share of the property development market. The two schemes have also resulted in the expansion of the construction sector.

4 The Enablers In the context of this Country Illustration an ‘enabler’ may refer to the quality of institutions, infrastructure, factors of production (labour, technology), connectivity and integration. All of these were present in the economic and social transformation of Mauritius. In fact transformation took place because of the effective interaction between the different enablers. The quality of institutions (the civil service, the Central Bank, the banking sector) ensured that funds were channelled to infrastructure development, that the labour force was adequately educated, and that the appropriate policies were adopted to improve connectivity. Institutions that were set up specifically to mobilise financial resources and facilitate the flow of funds include the Development Bank of Mauritius (DBM), the State Bank of Mauritius (SBM), the State Insurance Corporation of Mauritius (SICOM), the State Investment Corporation (SIC), the Mauritius Leasing Corporation and the Stock Exchange of Mauritius (SEM). In the initial phase, investment in social infrastructure (health, education) as well as in economic infrastructure (industrial estates, the port, the bulk sugar terminal, and the airport) served to foster the diversification of the economic base into tourism and manufacturing. To kick-start the industrialisation process the DBM set up industrial estates, which were rented out at preferential rates. The necessary funds were obtained by the government mainly from the Caisse Française de Développement and from the IFC. Some recent examples of infrastructure development and financing are provided in Annex 2.

Figure 4.1: FDI and GDI in Mauritius, 1980–2001

26

Source: Bank of Mauritius, 2001

The driving force of Mauritius’ development has been its export sector, namely the sugar industry, tourism and the EPZ. The relatively dynamic financial sector also played a crucial role in the development process. These sectors have all benefited from both domestic and foreign investment throughout their development. It is only from the mid-1980s that FDI started entering Mauritius in significant amounts, directed mostly to the EPZ and tourism (UNCTAD, 2001). Many Mauritian specialists suggest that another key factor of the country’s development success was the large proportion of domestic investment in these leading economic sectors, in particular private domestic investment. FDI played a significant role more because of the technological know-how it brought than because of the capital inflows as such. Indeed, the contribution of FDI to gross domestic investment (GDI) remained quite low throughout the 1980s, representing 6% in its peak year (Figure 4.1). However, FDI in tourism and the EPZ brought in the necessary technologies and know-how to transform them into leading sectors of the economy. It also enabled local investors to acquire and assimilate these technologies and know-how and develop domestic firms in the two sectors.

Table 4.1: Gross Domestic Fixed Capital Formation (GDFCF) (Rs million)

1970 1980 1990 2000 2010 2012

GDFCF 145 2,240 12,030 27,595 74,395 79,185

Private 94 1,375 7,560 19,866 59,667 60,175

Private (% of GDFCF) 65% 61% 63% 72% 80% 76%

Public 51 865 4,470 7,729 17,898 19,010

Public (% of GDFCF) 35% 39% 37% 28% 24% 24% Source: Statistics Mauritius

As stated in the previous section, the government did not use the tax revenue to develop infrastructure but on social expenditure (financing teachers and medical professionals; subsidies on food staples like rice and flour). This helped to keep cost of living relatively low so that wages could be held at a competitive rate to enable the export sector to flourish. Loans and grants from local and international sources were used to build schools, hospitals, the Bulk Sugar Terminal and to revamp the airport. The key elements that facilitated the transformation can be summed up as follows: Factors of production: In addition to adequate infrastructure as outlined above, Mauritius always placed major emphasis on the development of its human resources. Secondary education was provided free of charge to the entire age cohort from 1975. This helped to increase girls’ enrolment in secondary school and eventually provided a sufficient number of literate and semi-literate workers for the EPZ. The education system, modelled on the British system, also catered to the needs of the civil service and produced competent cadres to implement the policies. Furthermore, there was a class of local entrepreneurs who were ready to respond to the government’s incentives to move into tourism or manufacturing.

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National governance: An important factor in the sustained growth of the economy has been political stability, not in terms of the political landscape, which has experienced episodic turbulence, but in terms of broadly shared beliefs among the political class and consensual adherence to an economic strategy of outward orientation, market-driven development, and the rejection of nationalisation and inward-looking policies. This has provided continuity in the pursuit of broad objectives. The state played different roles in different phases of transformation, for instance as initiator, promoter, protector and arbiter. But it was a developmental state, committed to development of the country in which the rule of law prevails. The government was instrumental in securing access for Mauritian products and services through the negotiations of treaties (Yaoundé, Lomé, AGOA, DTAs) and joining regional groupings (the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC), the Indian Ocean Commission (IOC) and the Indian Ocean Rim Association (IORA)). The government intervened positively in the early stages of development to mobilise domestic and foreign capital for infrastructure development. As domestic savings were low and sugar was the only export sector, it had to ensure that the flow of foreign exchange from sugar exports remained stable so as not to handicap investment efforts. The Commonwealth Sugar Agreement guaranteed a favourable price but was to expire when the United Kingdom (UK) joined the then European Economic Community (EEC) in 1973. Mauritius therefore imposed an export duty (See Table 3.2) on sugar and a cess (a tax earmarked for a specific purpose) to fund research by the Mauritius Sugar Industry Sugar Industry Research Institute and the setting up of institutions (e.g. the Sugar Planters’ Mechanical Pool Corporation) to improve the productivity of small planters. Policy coherence: The success of Mauritius rested on its adoption of an outward-looking strategy since independence. The EPZA was passed in 1970, two years after independence. Unlike EPZs in other countries, the Mauritius EPZ did not refer to a specific geographical area, but was a legal entity which offered the holder of an export-enterprise certificate generous incentives: tax holidays, duty-free import of raw materials and equipment, free repatriation of capital and flexible labour regulations. The importance of an appropriate meso–micro incentive structure, consistent with macroeconomic objectives of stability, prudence and balance, cannot be over-emphasised. In spite of the above elements, the Mauritian economy did not really take off before the mid-1980s. The main reason was the failure to get prices right, i.e. exchange rate, interest rates, tariffs and tax policies had to be geared towards a clear goal – to achieve development by adopting an outward-looking strategy.

Before the SAPs, fiscal policy was characterised by high government expenditure, financed by high taxes and external borrowing (short-term Euro-Dollar loans to finance long-term infrastructure projects). The fiscal and exchange rate reforms undertaken in the context of the SAPs ensured more efficient fiscal governance (the overall budget deficit as a percentage of GDP remained at around 3% between 1985 and 1995), removed the distortions of a dual exchange rate policy and ensured that the Rupee was not overvalued. In general, however, Mauritius has used the exchange rate to have a competitive edge. From time to time there has been some overvaluation but corrective measures were quickly taken. These are illustrated in the two graphs from an IMF report on the competitiveness of Mauritius and the role of the exchange rate.

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Figure 4.2: Nominal and effective exchange rates, 1948–2007

Sources: Reinhard and Rogoff (2004); IMF annual reports on Exchange Arrangements and Exchange Restrictions (AREAER); and IMF Staff Reports from the late 1960s.

Figure 4.3: Nominal and effective exchange rates, 1980–2005

Source: Reinhard and Rogoff (2004); IMF Notice System, monthly data

Trade promotion: FDI was actively encouraged, and there was a general consensus that FDI was in the country’s interests. Mauritian nationality was offered to Hong Kong investors when the UK and China were discussing the fate of the then British colony in preparation for the handover in 1997. This second surge of investment from Hong Kong underpinned the remarkable growth of the textile and clothing sector in the 1980s. Institutions were set up specifically for the purpose of promoting trade and attracting investment and their boards of directors comprised more representatives from the private than the public sector. The exchange rate policy was instrumental in maintaining economic competitiveness, as shown in Figures 4.2 and 4.3. Furthermore, the private sector was also

29

given incentives to set up industrial estates to attract foreign investors. As can be seen from Table 4.1, private investment has on average made up around 70% of GDFCF. The bulk of capital was in the form of loans from the local commercial banks. Until the SAP in 1979 there was credit rationing in Mauritius whereby the Central Bank imposed ceilings on various categories of borrowers. The trade sector was discriminated against while productive sectors like agriculture, import-substituting enterprises holding Development Certificates, EPZ firms and the tourism sector benefited from discounted rates. The main provider of loans to the private sector was the Mauritius Commercial Bank (set up in 1838 with the seed capital being the compensation the British paid to planters when slavery was abolished), which was the main banker of the sugar sector.

Funding for social projects: The government of Mauritius is using an innovative financing mechanism to ensure that social projects are funded by the private sector. It imposes a Corporate Social Responsibility (CSR) levy of 2% of book profits towards programmes that contribute to the social and environmental development of the country. From January 2012, companies are required to spend 50% of their CSR Fund on the four priority areas: social housing; addressing absolute poverty and promoting community empowerment; the welfare of children from vulnerable groups; and the prevention of non-communicable diseases. As a result CSR becomes an innovative source of financing for some of the priority areas of the government’s agenda.

30

5 Complementary Means of Implementation (MoI)

Mauritius benefited from national and global complementary MoI. All participants in the Validation Workshop agreed that the non-financial MoI were the most important element in the transformation of Mauritius, the most significant being preferential market access and public–private sector dialogue and partnership. This section focuses on how the two sets of policies facilitated the mobilisation and effective use of finance. Global linkages: Collaboration with donors was an important enabler of structural transformation, both at the national level and in the restructuring of the sugar industry. Mauritius used bilateral and multilateral ODA relatively well, thanks to the combination of factors mentioned above. In addition, it is important to highlight the technical assistance provided by the UN specialised agencies, the Commonwealth Secretariat, AFD and the EU, among others. Many of the programmes were successful because there were consultations with local stakeholders in their conception and design. Without such technical assistance (often provided on a grant basis) it is doubtful whether Mauritius, with its limited human resource base, would have moved so fast. The flexible attitude of foreign institutions also helped. Mauritius was perhaps lucky to have interlocutors who believed in local ownership of development programmes and not in universal blueprints! Global MoI: The success of the Mauritian economy was largely dependent on preferential treatment in the main export markets for sugar and textiles. Figure 5.1 presents the key trade agreements which facilitated the development of Mauritius during each of its transitional phases: the Commonwealth Sugar Agreement, which provided guaranteed quotas for the UK and European markets; the Lomé Convention, which provided duty-free and quota-free access to the EU and which later became the Cotonou Convention; and the African Growth and Opportunity Act (AGOA), which in the post-MFA period gave access to the US market. The private sector was often closely involved in the negotiations. For example, in the case of the Sugar Protocol, the sugar industry had offices in London and Brussels to complement the work of the Mauritian embassies in gathering intelligence and lobbying the key players. The negotiations for the AGOA were driven by the private sector, with substantial support from the government. Table 5.1: International MOIs providing preferential treatment in the main export markets for sugar and textiles

Period International MOIs Facilities provided

Up to 1974 Commonwealth Sugar Agreement

Provided guaranteed quotas for the UK market

1971-75 Yaounde Convention Preferential tariff to EEC goods and duty-free and quota-free access to the EEC markets and financial aid from the European Development Fund and the European Investment Bank

1975 Lomé Convention (later the Cotonou Convention)

Duty-free and quota-free access to the European Union

2000 African Growth and Opportunity Act (AGOA)

Access to the US market

Figure 5.1: Implementing reforms

31

Development Certificates

C S A

1970

Monocrop Economy

EPZ

Hotel Certificates

Macro economic reforms

(SAP)

LOME

1980

Manufacturing & Tourism

Fiscal Reforms

Telecoms Env

Offshore activities

Freeport

Blueprint for sugar

COTONOU

1990

Manufacturing & Services Economy

VRS I

TEST (Textile)

Open up telecoms

Landlord & Tenant

Act

ICT / BPO

COTONOU /

POST MFA

2000

Business

Platform

Implementing Reforms

2010

MAAS

Fiscal reforms

Business Facilitation

Opening up to skills

New labour laws

Open up air access

Empowerment Prog

Eradication of Absolute

Poverty (EAP)

Financial crisis

Euro zone crisis

WTO

EPA

Integrated

Business Platform

Source: Makoond (2011)

In June 1973 Mauritius signed the Yaoundé Convention, which gave preferential tariff to EEC goods and duty-free and quota-free access to the EEC markets. This treaty also enabled the island to benefit from financial aid from the European Development Fund and the European Investment Bank. The Lomé Convention was to provide Mauritius with sufficient market openings for its growing textile industry. In addition it guaranteed a market for 505,000 tonnes of sugar per year under the EEC-ACP Sugar Protocol at a price usually higher than the world price. During the sugar boom the guaranteed price was lower than the world price but Mauritius respected the convention although it ran counter to the profit-maximising motive. As Gulhati and Nallari (1990) showed in Table 5.2, the negotiated sugar price had a positive impact on the Mauritian economy over time. The authors define the EC dividend as the difference between the ‘value of sugar exported at EEC prices and free market (international) prices. EEC dividend amounted to US$487.5 million during 1968-80 (of which US$346.7 million is during 1977- 79) and US$799.5 million during 1980-86’. Using the Harrod–Domar framework they calculated the impact of the EEC dividend on the economy and found that absolute savings (and investment) due to EEC dividend from 1968 to 1980 was US$122 million (of which savings during the 1977–1979 period amounted to US$87 million), and from 1980 to 1986 was US$200 million.

The increase in national income during 1968-80 (i.e., 13 years) is US$529 million. This is equivalent to 7.0% of total GDP in 1968-80. Similarly, increase in national income during 1977-79 is US$87 million, which is equivalent to 3% of total GDP in 1977-79. Lastly, increase in national income during 1980-86 is US$467 million, equivalent to 5.7% of total GDP in 1980-86. (Gulhati and Nallari, 1990: PAGE 73)

Table 5.2 EEC dividend and its impact on the economy of Mauritius, 1968–1986 (US$ millions, current prices)

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Source: International Commodity Markets Division, World Bank (1987)( This table is extracgted from Gulhati and Nallari, 1990: PAGE 73))

The Sugar Protocol provided the government with the main means to mobilise finance. Indeed, all sugar proceeds had to be repatriated, thus providing foreign currency and liquidity to the banking sector enabling it to meet the domestic demands for funds from both the public and private sector for infrastructure and capital investment (e.g. plant modernisation, technology imports). The exports revenue was supplemented by external grants and concessional loans made available as part of the various international agreements. National MoI Public–Private Dialogue: A key factor in the transformation of the economic structure in Mauritius is the shared vision of the public and private sector. The close public–private sector collaboration forms part of good governance as it shows willingness on the part of political leaders to dialogue and a sense of responsibility on the part of industrial leaders to participate constructively in the policy-making process. A precondition for such effective dialogue is the existence of a structured private sector. Conscious of this, the private sector organised itself to speak with one voice in its dealings with the government and established the Joint Economic Committee (JEC) which comprised all the private-sector bodies (i.e. the Chamber of Commerce, the Employers’ Federation, the Chamber of Agriculture, the Sugar Syndicate). It was headed by a previous minister, who understood the workings of the public sector. Thus, the relationship was built on trust, on the understanding that the government had social responsibilities and that the profitability of the private sector was not its sole concern. There are inevitably tensions but the existence of mechanisms for dialogue ensured that solutions were found. This dialogue was facilitated by annual meetings between the JEC and the Prime Minister and his economic ministers.

It was this collaboration (at times very informal) which led to certain key initiatives, such as the EPZ being set up, the first hotels being built, successful negotiations on the Sugar Protocol with the

Year EEC dividend

1968 5.9

1969 6.2

1970 8.0

1971 7.3

1972 12.9

1973 22.8

1974 34.0

1975 16.4

1976 27.1

1977 86.3

1978 119.9

1979 140.7

1980 -70.9

1981 26.1

1982 147.1

1983 121.3

1984 142.8

1985 168.4

1986 193.8

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posting of representatives of the sugar sector to London and Brussels to lobby the EU to secure favourable access for Mauritian products generally, the creation of the national airline, the establishment of a stock exchange and a freeport, investment in Mozambique, and the adoption of VAT. All the participants at the Validation Workshop highlighted the public–private sector dialogue as the major element underpinning all transformations in Mauritius. Many enabling institutions, support agencies, schemes (see Annex 3) or policies emerged from discussions at the level of the private and public sectors. In addition private sector institutions are represented in many governmental institutions in order to obtain consensus and buy-in in projects being developed. Through this mechanism, the private sector has the opportunity to propose, share and participate in decisions related to the priority infrastructure required for the country’s development and to define the role it could play in the necessary financing.

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66 LLooookkiinngg AAhheeaadd

As Mauritius tries to explore new sources of growth while at the same time having to upgrade its infrastructure to take it to the level of a High Income Country (HIC), it will confront the enormous challenge of mobilising financial resources. The main challenge is how to boost growth by upgrading its infrastructure and also attain a debt/GDP ratio of 50% by 2018, down from 59% in 2014.

Table 6.1 Planned infrastructure development financing (Rs million)

2012 2013 2014 2015 2016 2017 2018

Infrastructure 19,462 21,120 28,458 31,568 30,006 31,550 32,830

%GDP 5.7 5.8 7.2 7.3 6.4 6.1 5.8

FINANCING

Public 13,343 17,050 19,627 18,390 18,656 19,110 19,510

SOEs 6,119 4,070 8,831 8,148 5,230 5,000 6,000

o/w Loan fr Gov

1,012 914 2,048 3,526 2,754 1,800 2,300

Private - - - 5,030 6,120 7,440 7,320

Source: Ministry of Finance and Economic Development

Table 6.1 is a projection made by the Ministry of Finance and Economic Development of their financing requirements for infrastructure development, which is estimated at Rs 155 bn from 2014 to 2018, to pay for land transport, water/wastewater, power, port, airport, social housing and other social capital. As noted by one of the participants of the Validation workshop,

In the 1970–90 [sic] the figures that were required for investment could be raised locally from private and public investment etc. Nowadays, to meet the ambitions of business, the funding requirements are more important and we need new mechanisms to deliver that. We need to transform the public and private sector approach for finance mobilisation.

Policy-makers will need to have recourse to innovative financing instruments because of their limited fiscal space. The validation workshop participants agreed that:

There is no way we can fund all of our infrastructural and developmental needs through government expenditure alone (e.g. pork barrel policies). The rule is to identify the Infrastructural needs, build the competencies or get the people, promote governance and building consensus.

While discussions about the mode of finance continue, a few general principles/orientations have been identified:

Greater private-sector participation in public projects

Development of long-term infrastructure bonds

Equity participation in public projects by commercial banks, local pension funds, asset managers and export credit agencies

Continued dependence on international budget support and project loans

Leveraging the capital market

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It is clear that the structural transformation which was initiated in mid-2000 will require adequate financing as well as other MoI, namely a substantial increase in productivity, improved efficiency and absorptive capacity, and the import of highly skilled labour. Typically, the traditional sources of finance are grants, equity, debt, and mezannine finance, i.e a hybrid of debt and equity. Grants remain important as they often play a catalytic role. The government will have to reduce its debt burden as a condition of the GBS programme with the EU. This means that the private sector will have to bring in more equity and there may be a rise in mezzanine finance. Participants of the Validation Workshop mentioned that:

We need to identify key areas of investment in infrastructure that is required to unlock our growth potential. We can get money from everywhere as long as the process is transparent for example the Airport, ICT, Energy, Water, Sanitation etc. Similarly we need a modern port for logistics centre. If we bring the international players they can do it, otherwise govt [sic] may decide to implement by itself, with the consequences of increasing budget deficits and lesser effectiveness. However, education and health and social investment may be trickier. The architecture and the rules of the game must be clear.

The Stock Exchange of Mauritius (SEM) may be called upon to play a more important role for the financing of national projects in the future. The SEM has defined a strategy to internationalise and to become a regional centre for raising capital. Several firms already have raised capital on the SEM, a trend that is expected to persist in the future. The factors that will make the SEM a more dynamic source of financing for regional projects will need to be examined if the SEM is to become a future platform for sourcing of finance from local individuals, investors, companies, fund managers etc. Public–Private Partnerships (PPPs) are seen as another source of funding for major infrastructure development, although there is as yet little know-how in Mauritius about how to manage these. There is an urgent need to build up human capital in the financial services sector to be able to propose complex financing instruments. Indeed, the Mauritius Financial Services Centre could be a source of funds for investment in Mauritius. At present, funds and global businesses are not allowed to conduct business in Mauritius while loans are structured in Mauritius for other markets. Conclusions The Mauritius Country Illustration has shown that different phases of transformation may require different mixes of financing. While in the past the government borrowed heavily to invest in infrastructure and used the negotiated preferential access to markets to generate tax revenue for social development, this option is no longer sustainable because as a condition of the GBS programme agreed with the EU, the government of Mauritius has committed to reduce its total debt burden to 50% of GDP by 2020. In the next phase of transformation, the private sector is therefore expected to play a leading role. The discussion at the Validation Workshop made clear that there are some choices that may be politically unacceptable (e.g. privatisation of Mauritius Telecom or of the national airport), while others that may hold promise (such as PPPs) have not been successful so far. At present, Mauritius finds itself at a crossroads where it knows where it wants to go, but is not certain about how to get there.

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Even past enablers – for example, its flexible and adaptable labour force – are no longer sufficient to bring about transformation. The fact that Mauritius has an ageing population means that it will need to attract highly skilled labour in order to fulfil its ambition to become a HIC by 2020. This is why the participants at the Workshop emphasised the continuing importance of ODA, not in terms of absolute amounts, but rather for its catalytic role in fostering a sense of discipline and rigour and for the technical expertise that it brings.

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RReeffeerreenncceess

African Economic Outlook (DATE?) Mauritius 2012. Tunis: African Development Bank. Alvaredo, F., Atkinson, A.B., Picketty, T. and Saez, E. (2013) The World Top Incomes Database. Available at: http://eml.berkeley.edu/ (accessed 20 June 2014). Bank of Mauritius (various issues) Annual Reports. Port Louis: Bank of Mauritius. Board of Investment www.investmauritius.com (accessed 20 June 2014). EU Delegation Mauritius website, EU assistance to sugar sector Kuefferl, C. and Mauremootoo, J. (2004) ‘Case Studies on the Status of Invasive Woody Plant Species in the Western Indian Ocean 3 Mauritius (Islands of Mauritius and Rodrigues)’. Working Paper FBS/4-3E. Rome: Food and Agriculture Organization. Available at: http://www.fao.org/forestry/6841-0e7cfea9831eda23d257761475d511f36.pdf/. Gulhati, R. and Nallari, R. (1990) Successful Stabilization and Recovery in Mauritius. Washington, DC: World Bank. International Monetary Fund (various years) Country Reports. Washington, DC: IMF. Kalamova, M., Kaminker, C. and Johnstone, N. (2011) ‘Sources of finance, Investment policies and plant entry in the renewable energy sector’. OECD Environment Working Papers No. 37. Paris: OECD. Makoond, R. (2011) Mauritius Economic Trajectory. Port Louis: Joint Economic Council.

Meade, J.E. (1961) The Economic and Social Structure of Mauritius: Report to the Governor of Mauritius. London: Methuen. Ministry of Finance and Economic Development (n.d.) Public Sector Investment Programme 2014–2018. Port Louis: MFED. Ministry of Finance and Economic Development (various issues) Economic Indicators. Port Louis: MFED. Mistry, P.S. and Treebhoohun, N. (2008) The Export of Tradeable Services in Mauritius: A Commonwealth Case Study in Economic Transformation. London: Commonwealth Secretariat. National Empowerment Foundation (n.d.) Corporate Social Responsibility Guidelines. Available at: http://www.nef.mu/csr/ (accessed 30 April 2014). National Productivity and Competitiveness Council (2004) Competitiveness Foresight. Port Louis: NPCC. Statistics Mauritius (2007) Poverty Analysis

Statistics Mauritius (2010) Digest of Environment Statistics Statistics Mauritius (2011)Digest of Productivity Statistics Statistics Mauritius (2011) Digest of Public Finance Statistics

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Statistics Mauritius (2012) Household Budget Survey 2012, Preliminary Results Statistics Mauritius (2013)Digest of Energy and Water Statistics

United Nations Department of Economic and Social Affairs (2013) Report on the World Social Situation: Inequality Matters. New York: UN DESA. United Nations Conference on Trade and Development (2001) Investment Policy Review: Mauritius. Geneva: UNCTAD. World Bank (various issues) Global Development Finance Reports. Washington, DC: World Bank. World Bank (various issues) World Development Indicators. Washington, DC: World Bank. World Bank (1987) International Commodity Markets Division.

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Table D: Main energy indicators, Republic of Mauritius, 2001–2010

Source: Statistics Mauritius

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Table E: Environmental Performance Index 2008,2010

Source: Statistics Mauritius

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Figure B: School enrolment, primary (% gross)

Source: World Development Indicators, http://data.worldbank.org/country/mauritius

Figure C: CO2 emissions (metric tons per capita)

Source: World Development Indicators, http://data.worldbank.org/country/mauritius

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Figure D: Improved water source, rural (% of rural population with access)

Source: World Development Indicators, http://data.worldbank.org/country/mauritius Figure E: Life expectancy at birth, total (years)

Source : World Development Indicators, http://data.worldbank.org/country/mauritius

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Table F: Education sector indicators 2009-2013

Source: Statistics Mauritius, Education Statistics 2013

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Figure D: Carbon dioxide emissions 2003-2012

Source:Statistics Mauritius, Environment Statistics 2012

Figure E: Under 5 mortality rate per 1,000 live births

Source : Statistics Mauritius, Millennium development Indicators

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Figure F: Internet subscriptions per 100 population

Source : Statistics Mauritius, Millennium development Indicators

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AAnnnneexx 22:: IIMMFF

(See attached pdf document , source IMF Country report, June 2006)

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