For the second year in a row, the Minister of Finance had to prepare the national budget with the continuing threat of Covid-19, amidst an uncertain international economic environment, the spectre of stagflation and the low confidence levels across the general population. With an expected budget deficit of 5.6% for 2020/2021 and unemployment rate at 9.2% and a Debt-to-GDP ratio of 95%, the Minister of Finance was tasked to propose, a sound, yet resilient plan to propel the country on an inclusive growth trajectory. We assess below his proposals on various fronts.
Construction leads the way…again
Boosting investment was always going to be the order of the day. A sense of “déjà vu” was noted when the Minister announced, yet again, several large-scale infrastructure projects (also the case in his maiden budget). Some Rs 65B has been earmarked for priority projects which covers National Flood Management Programme, construction of social housing units, community development projects and land transport projects (including Metro Express). It is worth highlighting that some Rs 4.5B has been budgeted for the extension of the Metro from Rose Hill to Reduit, via Ebene and Rs 8B for the construction of Urban Terminals at Vacoas, Rose Hill, Quatre Bornes and Curepipe (i.e., linking with the Metro track). The profitability and financial viability of the Metro project, remains to this date, unclear. Added to these, construction of new hospitals, schools, sports infrastructure also fuel the construction-led “growth” which the Minister posits in this budget.
The Minister has in this budget, also provided several measures to induce private-sector led construction growth. The registration duty for first-time buyers of property has been revisited with a Rs 5m “band” now included. Furthermore, the Home Ownership Refund Scheme (whether equity or loan financed) provides for a refund of 5% of the property value (or loan value), capped to Rs 500k. The Minister is thus betting on the same old recipe i.e., that Gross Fixed Capital Formation (GFCF) from both the public and private sector will pave the way for growth and job creation.
Tourism remains at crossroads
As one of the main pillars of our economy, the tourism sector’s difficulties have been laid bare. With the sector dependent on the overall roll-out of vaccines (locally) as well as global economic recovery, the tourism sector remains at crossroads. A decision has been taken to re-open the borders to vaccinated tourists (subject to a 14-day quarantine) as from 15th of July this year. As from 1st of October, all vaccinated tourists with a negative PCR test will be allowed in without any quarantine. The aim is to attract some 650k tourists (i.e., around 50% of our pre-covid tourist levels).
Government support for the tourism support has been continuous since the first lockdown in 2020. The Minister reported that some Rs 8.5B had already been incurred on account of the Wage Assistance Scheme and that this support will be continued until September 2021.
The tourism sector will however continue to remain fragile in the current context, with all support provided so far, and to be provided in the future, continuing to represent a “shallow” investment by the Government in this sector.
Rallying to the sustainability movement
The Government’s decision to review its energy policy was much needed. The Central Electricity Board will invest some Rs 5.3B over the next 3 years across renewable energy projects. We also noted that the CEB will also launch a Request for Proposal to set up a 40MW windfarm that will require some Rs 2.4B of investment. Some Rs 2.2B has also been earmarked for the National Environment Fund.
This is also in line with the formalisation of the framework for sustainable bonds which was finalized this month by the Bank of Mauritius.
Continuing the support for entrepreneurs
The support for entrepreneurs continued via the setting up of a Modernisation and Transformation Fund, with some Rs 5B which will be managed by another Industrial Financial Institution (IFI). The IFI however is merely an “amalgamation” of two existing entities of the Government which had similar purpose. The IFI can also invest up to Rs 1m per project on licensed crowd lending platform – which will imply reaching a wider range of entrepreneurs.
Several other facilities are also offered by the Development Bank of Mauritius such as loans with preferential / concessionary interest rates.
The salary compensation for SME of Rs 375/month was maintained for the fiscal year 2021-2022 by Government, and a refund will be made for the period January to June 2021.
Business environment
The budget includes several measures which aim to improve the overall business environment and make it conducive. Right from digitalisation, to the setting up to several platforms and regrouping of schemes, this is likely to enhance the attractiveness for doing business.
Following the blacklisting by the EU and the UK, much attention has been relentlessly devoted to the Financial Services Sector. Amongst the various measures, we note the review of the legislative framework for securities, as well as the creation of a Financial Crime Commission and the introduction of new bills for the banking sector.
The Bank of Mauritius is also expected to roll out a Central Bank Digital Currency (CBDC).
Creation of a new industry: Medical, Biotechnology and Pharmaceutical
The Minister announced several measures with a bid to create a major new manufacturing industry. To that end, the Minister proposed several measures (most of which are tax driven) to incentivize investment in this sector. A seed capital of Rs 1B is also earmarked to be provided to the Mauritius Institute of Biotechnology for the setting up of a manufacturing plant for local production of Covid-19 vaccines and other pharmaceutical products.
A relatively unchanged fiscal framework….or not?
The personal tax framework remained largely unchanged – with no introduction of new major taxes or an unchanged income exemption threshold, a first since several Budgets. Although we note deductions which can be claimed filing were reviewed (such as for medical insurance, and pension schemes). This simply implies that the Minister has been able to maneuver on the recurring income side, with no major considerable hit, at least from personal income taxes.
The main tax change is mainly via the introduction of a “Vaccine Levy” of Rs 2 on every litre of mogas and diesel purchased. As per the Minister, this will make vaccination “free” for all. A dichotomy it would seem. This is expected to hit consumers directly – although this may encourage Work from Home schemes to continue for a much longer period of time than expected.
Finally, the last masterstroke by the Minister was an increase in the excise duty of alcoholic and tobacco products by 10%.
The Budget pays no attention to the regressiveness of the tax system and no measures have been taken to alleviate the fiscal burden of the poor and the middle class.
Concluding Remarks
We take the view that economic institutions are the ultimate determinants of economic performance and prosperity. Independent, transparent, and accountable institutions support economic development through several channels and determine the degree to which the environment is conducive to innovation, entrepreneurship and increased social capital. Unfortunately, no attempt has been made to bring these much-awaited reforms.
Without the reforms, the Budget 2021 lacks a unifying theme. It is all about spending billions more on projects and growing the size of Government in the economy.
