Promoting Economic Transformation and Social Inclusion
The Honourable Finance Minister delivered his third Budget Speech in a stressed international context marked by the prevailing Russia-Ukraine war and the resulting repositioning of geopolitics, a considerable rise in global energy and commodity prices due to supply shortages and disruptions, the continued albeit lower prevalence of COVID-19, and the spreading of Monkeypox. He highlighted the considerable policy response put in place over past two years to support the economy and preserve social inclusion. He announced measures to address current hardships faced by a growing part of the population due to erosion of purchasing power, through social aid and subsistence allowances aimed at ensuring access to basic commodities like rice, cooking gas, milk, edible oil and pharmaceutical products.
To support the domestic economy amid the current challenging growth environment, public investment will be enhanced in existing economic pillars and emerging sectors, with due regard to environmental impact of projects given the commitments taken by Mauritius at the COP26 Summit held in November 2021. The opening of borders in October 2021 has resulted into an increase in tourist arrivals which is forecast to reach 1 million in 2022, though the Russia-Ukraine War, if sustained over a lengthy period, might have an adverse impact, since Europe is the main source of tourists.
Domestic macro fundamentals have, in general, continued to be under pressure over the past year. Headline inflation has been on a steady rise, reaching 7 percent in Apr 2022, driven by international commodity and freight prices, and depreciation of the Mauritian rupee. The Current Account Deficit to GDP ratio further worsened, from 12.6 percent in 2020 to a trough of 15.3 percent in 2021. From January to April 2022 Gross Official International Reserves fell by 15 percent, from USD 8.56 billion to USD 7.28 billion, with Import Cover decreasing from 17.6 months to 14.8 months. Public sector debt at June 2022 is estimated at 87.4 percent of GDP, down from 96.1 percent at June 2021. The rate of economic growth, estimated at 4.8 percent for 2021 and at 6.9 percent for 2021/22, and forecast at 8.5 percent for 2022/23, should improve debt repayment capacity, amid prevailing pressures on the country’s reserves. Budget Deficit to GDP has been evolving in a stable range of 3.0 percent – 3.5 percent up to 2018, rocketed to 13.6 percent in 2019/20 due to COVID-19 response, and is estimated at 5 percent in 2021/22 and at 4 percent in 2022/23. The budget deficit might remain under pressure over the coming financial year should global prices result into higher domestic prices. Unemployment rate fluctuated between 7 percent and 8 percent prior to COVID-19, stood at 9.1 percent in 2021 and is forecast at 7.8 percent in 2022. Over the past decade, consumption expenditure increased from 73 percent to 84 percent of GDP while private investment and exports combined, decreased from 70 percent to 50 percent of GDP, implying a need for rebalancing aggregate expenditure away from consumption, major part of which leaks out in the form of imports. Non-Performing to Total Loans, which decreased from 6.2 percent at December 2020 to 5.8 percent at December 2021, might reverse course should support measures by the Bank of Mauritius be phased out.
The IMF has, from January to April 2022, revised global growth forecast for 2022 downward by 80 basis points, to 3.6 percent and is projecting global inflation for 2022 at 7.4 percent. This reflects to a considerable extent, the direct and indirect impact of the Russia-Ukraine war. In response to heightened inflation, global central banks led by the Fed have been switching to a tightening mode and are set to remain so, at least until end of 2022, with multiple interest rate hikes expected. The Monetary Policy Committee of the Bank of Mauritius, met last week on 3 June and raised the Key Repo Rate by 25 basis points to 2.25 percent. Of note, the Spread between Mauritius and US Yields has been on a declining trend, moving into negative territory since early 2022, and may lead to a further weakening of the Mauritian rupee.
This budget promotes food security, including through incentives and grants aimed at intensified use of marine resources by fishermen and of agricultural land by planters and farmers, thereby reducing import dependence and enabling the country to better face global supply disruptions. Manufacturers, including SMEs, targeting the local market will receive deeper institutional and financial support, whilst exporters will benefit from planned regional feeder vessels in addition to existing rebate schemes. To consolidate the tourism industry, marketing budget will increase by 10 percent and additional facilities to welcome high-end tourists will be set up. The commitment to construct 12,000 houses by 2024 is reiterated and the road construction programme is extended.
The authorities will continue to upgrade financial sector infrastructure and legislation, including a regional clearing mechanism for the yuan, the issuance of “RuPay” cards and Indian QR Code, a digital industry academy and enabling re-insurance companies to set up in Mauritius. International talent will continue to be attracted through premium visa. The Bank of Mauritius will expedite opening of bank accounts for individuals and corporates, within a week. A domestic minimum top-up tax of 15 percent will be imposed on resident companies of multinational corporations. Carbon neutrality is targeted by 2030, through incentives to engage in renewable energy and switch to hybrid or electric vehicles.
Excise duty on alcohol and tobacco products will increase by 10 percent. The municipal tax is phased out from July 2022, while all basic pensions will increase by MUR 1,000. A new income tax rate of 12.5 percent for middle-income workers earning between MUR 53,846 and up to MUR 75,000 monthly is introduced.
This budget, whilst seeking transformation of the economy, also attempts to address the immediate concern of the population experiencing eroding purchasing power. The outcome will depend on the achievement of robust domestic economic growth, which in turn is inevitably linked to the uncertain global economic landscape.
By Jameel Khadaroo, Partner – Consulting, Deloitte Mauritius