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Economic Review
According to the International Monetary Fund (2008), global growth decelerated from 5 % in 2006 to 4.9 % in 2007. The main risk to the outlook for global growth was the ongoing turmoil in financial markets that reduced domestic demand in the advanced economies and created more significant spillovers into emerging markets and developing economies. While growth rate in advanced economies fell from 3.0 % to 2.6 %, that in developing and emerging markets rose from 7.7 % to 7.8 %. Economic growth in the United States slowed in 2007. Residential investment continued to exert a significant drag on growth, which fell from 3 % in 2006 to 2.6 % in 2007. The economy was also badly affected by the turmoil in the financial markets. While personal consumption spending, employment, and nonresidential construction data were solid, housing market indicators were very weak and so was consumer sentiment. Recent confidence indicators of the Euro Area deteriorated leading to a slow economic growth from 2.8 % in 2006 to 2.7 % in 2007. A decrease in the growth rate was also noted in Central and Eastern Europe from 6.4 % in 2006 to 5.5 % in 2007. In Japan, growth was dampened from 2.4 % in 2006 to 1.9 % in 2007 due to a tightening in building standards. Consumer and business sentiments were also weak. Japanese investors were increasingly turning to foreign investments to diversify their portfolios and earn higher returns, through mutual funds, pension and life insurance companies.
Despite some slowing of export growth, emerging markets and developing economies, led by China and India, continued to expand strongly. These economies benefited from the strong momentum of domestic demand, more disciplined macroeconomic policy frameworks, and for commodity exporters, from high food and energy prices as well. The pace of expansion in the Western Hemisphere stagnated at 5.4 % in 2006 and 2007. On one hand, a number of Latin American countries experienced heavy capital inflows that increased international reserves and contributed to the rapid credit growth and rising equity prices. But on the other, these countries suffered from the slowdown of activity in the United States mainly through trade linkages and the end of a hotel construction boom in the Caribbean. Growth rate in the Commonwealth of Independent States (CIS) region rose slightly from 8.1 % in 2006 to 8.2 % in 2007 mainly due to high commodity prices and rising fiscal spending that continued to support activity in the net-energy-exporting countries. Consumption remained the main driver of growth, supported by rising real incomes and easy access to credit. Most African countries attracted rising private capital inflows and benefited from some step up in aid inflows and rising remittances. The combination of more openness, consistent policy reforms, reduction in debt burdens improved the growth rate, which reached 6.0 % in 2007 compared to 5.8 % in 2006. African countries were able to expand nontraditional manufacturing exports and to diversify export destinations. The long spell of strong growth in the Middle East continued to be supported by high oil prices and robust domestic demand. Regional growth reached 6.0 % in 2007, against 5.8 % in 2006. Although investment in the oil sector stagnated in real terms because of increasing investment costs, GDP growth in oil-exporting countries was sustained by expansion in the non-oil sectors. Mauritian Economic OutlookEvolving from a state characterised by an appreciable degree of uncertainty and pessimism in 2006, the outturn in 2007 shows evidence of enhanced stability and consolidation, although some weaknesses still exist in a few sectors of the economy. From a purely short-term point of view, one can objectively rest satisfied with the results obtained. But from a more qualitative, sustainable perspective, there are well-grounded arguments for a more cautious examination of the overall socio-economic environment. The favourable results in 2007 include:
These results are mitigated by the following consideration:
Fischer et al. (1996) "Growth requires stabilisation and stabilisation leads to growth" In 2007, GDP at basic prices reached Rs 206.9 bn compared to Rs 182.0 bn in 2006. In real terms, a growth rate of 5.4 % is recorded compared to 5.0 % in 2007. Taxes, net of subsidies, amounted to Rs 28.5 bn in 2007, compared to Rs 24.3 bn in 2006, showing an increase of 17.4 %, higher than nominal increase of 13.7 % of GDP. GDP per capita at market prices rose by 13.5 % from Rs 164,636 in 2006 to Rs 186,831 in 2007. In dollar terms, GDP per capita rose by 12.8 % from US$ 5,190 in 2006 to US$ 5,855 in 2007. However, in Euro terms, GDP per capita rose by only 4.6 % from Euro 4,081 in 2006 to Euro 4,269 in 2007.
The higher growth in 2007 can be explained by the outstanding performance of three sectors: Construction, Hotels and Textiles. Growth rate in the Construction sector increased from a moderate 5.2 % in 2006 to a very high 15.2 % in 2007 thanks to hotels and IRS development in addition to projects in other business sectors. This is the second highest growth rate of the sector during the last 30 years. The record figure is 16.1 % and was obtained in 1988. In the hotel sector, owing to an exceptional increase in the number of tourists, growth rate increased from a low 3.5 % to 14.0 %, highest during the last 20 years. In the textile sector, there has been a surprising growth of 8.5 %, the highest since 1988. In four other sectors, growth was sustained at over 7 % and somewhat higher than in 2006. They are “Transport and Communication”, “Finance”, “Real estate, renting and business activities” and “Community and personal services” . Investment (Gross Domestic Fixed Capital Formation - GDFCF)Warren Buffett (1930), “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances …”
GDFCF (excluding aircraft ) grew by 27.7 % from Rs 44.4 bn in 2006 to Rs 56.7 bn in 2007. In real terms, investment grew by 17.0 % in 2007, which is excellent compared to 5.5 % in 2006 and –1.6 % in 2005. Private sector investment represented 82.0 % of total investment.
It is interesting to note that the share of the private sector has increased markedly from 62.9 % in 2003 to such a high level in 2007 while during the same period public investment has dropped in current prices. In real terms, public investment has dropped by 27 % since 2003, while private investment has increased by 64 %.
Aircraft is considered as an exceptional item. It amounted to Rs 5.7 bn in 2006 and Rs 2.5 bn in 2007. It is excluded in this analysis in order to have a more precise idea about the general trend of investment in the overall economy.
Investment rate, which is measured by the ratio of investment to GDP at market price, grew from 24.1 % in 2006 to 25.2 % in 2007. From an overall perspective, from 2000 to 2007, investment ratio grew along a shallow upward sloping trend. The following industrial sectors were the main recipients of investment in 2007: “Real estate, renting and business activities” (Rs13.6 bn), “Restaurants and hotels” (Rs 10.1 bn), “Transport, storage and communication” (Rs 8.6 bn) when aircraft is taken into consideration and “Manufacturing” (Rs 8.4 bn). Investment growth is obviously essential for economic development and the higher the growth rate, the better it is for our country. But at the same time, its sustainability and multiplier effects on the economy can be limited if is endangered by a high degree of concentration. In fact this is partly the case with a very high growth rate of 16.9 % in “building and construction”. The last two years have been exceptional years for Foreign Direct Investment (FDI). From Rs 2.8 bn in 2006, total FDI rose to Rs 7.2 bn in 2006 and to Rs 11.5 bn in 2007. FDI as a percentage of total investment grew markedly from 7.1 % in 2005 to 16.3 % in 2006 and further up to 20.3 % in 2007. FDI as a percentage of GDP more than doubled from 1.7 % in 2005 to 4.0 % in 2006. It reached 5.6 % in 2007.
The main benefiting sectors were: the hotels and restaurants sector, which received 51.9 % of total FDI and the financial intermediation sector with 35.2 %. Countries with the highest percentage of FDI were England (24.3 %), USA (20.7 %), Switzerland and Dubai (11.2 %) respectively. The high level of FDI is a novel situation for Mauritius and may pose a problem of management of foreign exchange reserves because of its indirect impact on exchange rate and possibly on the Current Account deficit through repatriation of investment income. This threat should incite the authorities to take actions to encourage savings. Rs M
On the other hand, Direct Investment Abroad grew from Rs 1.1 bn in 2006 to Rs 1.8 bn in 2007. The main countries to which these investments were directed are Maldives, Madagascar, Seychelles, Mozambique and Reunion. The resulting Net Foreign Direct Investment grew from Rs 865 m in 2005 to Rs 6.1 in 2006 and further up to Rs 9.7 bn in 2007.
Human Development Report (1998) “ …The real issue is not consumption itself but its patterns and effects.”
Owing to substantial increases in prices of petroleum products and basic commodities, it was expected that consumers would be affected in a significant way. In 2006, there were already signs of a slow down in consumption, and in 2007, this was more pronounced. Actually, consumption expenditure grew by only 4.5 % last year compared to 5.9 % in 2006. It is to be noted that the rate of growth of consumption in 2007 was plainly lower than that of GDP. The last time such a result was recorded was in 2000. The situation today is different. If on one hand, it is true that in general consumers are being hard hit by price increases, on the other, genuine development opportunities exist with sizeable investment in some specific sectors of the economy and which can vouch for an unmitigated economic growth at least in the short term. A closer examination of consumption expenditure reveals that the decline is more striking in the case of Government’s share. Indeed growth rate of Government expenditure dropped from 6.1 % in 2005 to 3.8 % in 2006 and further down to 0.8 % in 2007. It is perceptible from the above trends that the impact of demand on inflation has lessened.
The table below shows that consumption as a percentage of GDP rose substantially from 78 % in 2004 to 83.5 % in 2005. It again rose in 2006 but a small decline can be observed in 2007.
* GNDI = Gross National Disposable Income is obtained by adding net taxes on products and net income and transfers from the rest of the world to GDP ** Resource Balance = Savings – Investment (Including aircraft) Savings
Although the importance of FDI for the economic growth of Mauritius is not disputed, it is essential that reliance on foreign capital does not mask the weakness in savings. The savings rate has been decreasing since 2001. Savings as a percentage of Gross National Disposable Income (GNDI) fell from 27.9 % in 2001 to a very low 16.8 % in 2006. It increased to 20.3 % in 2007. Increasing the savings rate can only strengthen the economy, increase local ownership of investment and allow Mauritian investors to have a larger share of returns generated in the economy. External trade
Chau Tak Hay (2001), "In the process of globalisation, we are like riding on a bicycle. If you don't move on, you fall." Total value of trade which includes imports and exports increased slightly by 0.5 % from Rs 189.5 bn in 2006 to Rs 190.6 bn in 2007. On one hand, total export (f.o.b.), which represented 36.5 % of total trade, dropped by 6.2 % from Rs 74 bn in 2006 to Rs 69.5 bn in 2007. On the other hand, total import (c.i.f.) which represented 63.5 % of total trade rose by 4.8 % from Rs 115.5 bn in 2006 to Rs 121.1 bn in 2007. The trade deficit increased from Rs 41.5 bn in 2006 to Rs 51.6 bn in 2007. Rs Bn
The drop in total exports was mainly due to the marked decline in re-exports by 31.8 % from Rs 20.2 bn in 2006 to Rs 13.7 bn in 2007 (exclusive of re-exports of aircraft worth Rs 1.2 bn in 2006). However, this fall was partly counterbalanced by a 5.6 % rise in domestic exports from Rs 47.6 bn in 2006 to Rs 50.3 bn in 2007. Ship’s stores and bunkers rose by 7.3 % from Rs 5.1 bn in 2006 to Rs 5.4 bn in 2007. Imports were also influenced by exceptional items both in 2006 and 2007. Excluding acquisition of aircraft worth Rs 6.7 bn in 2006 and Rs 2.7 bn in 2007, the rise in import (c.i.f.) was higher by 8.8 % from Rs 108.8 bn in 2006 to Rs 118.4 bn in 2007. Imports in the Freeport zone dropped by 57.3 % from Rs 14.1 bn in 2006 to Rs 6.0 bn in 2007. Commodity-wise, the rise in domestic exports was due to increases in the following main items: “Articles of apparel and clothing accessories” from Rs 22.0 bn in 2006 to Rs 25.0 bn in 2007; “Fish and fish products” from Rs 5.0 bn to Rs 6.1 bn and “Textile yarns, fabrics and made-up articles” from Rs 1.5 bn to Rs 1.8 bn. Exports of cane sugar registered a decline from Rs 11.2 bn to Rs 9.3 bn while those of “pearls, precious and semi – precious stones” were stagnant at Rs 1.4 bn. Important changes were noted in re-exportation in 2007. On one hand, a small rise was noted in re-exportation of “articles of apparel and clothing accessories” from Rs 2.4 bn to Rs 2.9 bn. On the other, re-export of “machinery and transport equipment” dropped tremendously from Rs 11.9 bn in 2006 to Rs 3.9 bn mainly as a result of a decline in re-exportation of mobile phones to United Arab Emirates. This was followed by a drop in re-export of “manufactured goods” from Rs 1.8 bn in 2006 to Rs 1.6 bn in 2007. Correlatively, imports of telecommunications and sound recording equipment” fell from Rs10.7 bn in 2006 to Rs 5.4 bn in 2007. Rises in imports of items above Rs 500 m were noted in the following items: “Refined petroleum products” (+ Rs 1.9 bn); “General industrial machinery” (+Rs 1.2 bn); “Manufactures of metal” (+Rs 742 m); “Iron and steel” (+ Rs 732 m); “Wheat” (+ Rs 719 m); “Road vehicles” (+Rs 716 m); “Electrical machinery, apparatus and appliances” (+Rs 592 m); “Dairy products” (+Rs 574 m) and “Office machines” (+Rs 521 m). In 2007, main countries of origin were: India with Rs 25.6 bn, 63.4 % higher than in 2006 due to the fact that it became our main supplier of petroleum products; China, with an increase of 37.9 % from Rs 10.0 bn in 2006 to Rs 13.8 bn in 2007; France with a decrease of 22 % from Rs 16.4 bn to Rs 12.8 bn; South Africa from Rs 8.4 bn to Rs 8.9 bn and Japan from Rs 3.3 bn to Rs 4.3 bn. The above main countries of origin represented 54.1 % of total imports in 2007.
Imports of some basic foodstuffs in current value have risen tremendously since 2000 e.g. import of rice rose by 84 % from Rs 660 m in 2000 to Rs 1.2 bn in 2007. In quantity terms, it dropped from 76,000 tonnes to 63,000 tonnes. Wheat grew by 220 % from Rs 496 m to Rs 1.6 bn. Imports in quantity grew from 150,000 tonnes to 157, 000 tonnes. Imports of dairy products increased by 128 % from Rs 1.1 bn to Rs 2.4 bn while in quantity terms the rise was only from 21,000 tonnes to 23,000 tonnes. Vegetable oil and fats also rose by 177 % from Rs 364 m to Rs 1.0 bn in 2007 but in terms of quantity, it grew only from 33,000 tonnes to 36,000 tonnes. Such leaps in the prices of imports are bound to have an impact on inflation and the deterioration of the trade deficit. On the Services Account, exports of services rose by 29.5 % from Rs 53.1 bn in 2006 to Rs 68.8 bn in 2007. Imports of services increased by 14.6 % from Rs 42.1 bn in 2006 to Rs 48.3 bn in 2007. Consequently, the Services Account registered a surplus of Rs 20.5 bn, 86.6 % higher than in 2006. Thus, the overall deficit of the balance of trade in goods and services worsened slightly from Rs 23.5 bn in 2006 to Rs 23.7 bn in 2007. It is noted that a surplus of Rs 2 bn was last recorded in 2003. The surplus registered in the Income Account grew from Rs 1.6 bn in 2006 to Rs 7.5 bn in 2007 mainly due to the rise in the interest income of banks. Another surplus of Rs 3.7 bn was registered in “Current Transfers” in 2007 compared to Rs 2.3 bn in 2006. The Current Account (i.e. Balance of trade in goods and services + Income Account + Current Transfers) showed a deficit of Rs 12.5 bn in 2007, 36.3 % lower than the Rs 19.6 bn deficit in 2006. A negative Current Account balance requires a positive Capital and Financial Account, implying that the country has accumulated debt or it has lost out on its stock of assets held by foreigners. The Capital and Financial Account recorded a surplus of Rs 2.1 bn in 2007. This was lower than the Rs 6.6 bn recorded in 2006. Net international reserves which comprise net foreign assets of banks, foreign assets of the Government and the country’s reserve position in the IMF, rose by 20.6 % from Rs 74.2 bn in December 2006 to Rs 89.5 bn in December 2007. 57 % of the net international reserves consist of net foreign assets of the Bank of Mauritius. It increased by 15.6 % from Rs 44.1 bn to Rs 51.0 bn. Net foreign assets of banks grew by 29.4 % from Rs 29.4 bn to Rs 38.2 bn. The overall Balance of Payments (BOP) showed a surplus of Rs 13.9 bn in 2007 compared to a deficit of Rs 4.6 bn in 2006. Vernengo (2005), “Price revolutions begin in periods of prosperity and end in periods of crises.” Headline inflation, which is measured by the percentage increase in the yearly average Consumer Price Index (CPI), dropped slightly from +8.9 % in 2006 to +8.8 % in 2007. However, this level remained high compared to the average annual inflation of 5.8 % over the last 12 years. The high level of inflation was mainly attributed to the rise in prices of energy and other products having a high weightage in the CPI basket. The CPI basket of goods and services was reviewed with the last 2006/7 Household Budget Survey and a new CPI base introduced as from July 2007. Based on it, the average yearly CPI increased from 95.4 in 2006 to 103.8 in 2007. The main items contributing to the inflation were: “Food and non-alcoholic beverages” (more particularly increases in prices of milk, vegetables, rice, fish and cooking oil); “Transport” (price increases in gasoline and diesel oil); “Clothing and footwear” (higher prices of footwear and ready-made garments); “Restaurants and hotels” (higher charges of food and drinks in bars and restaurants). It is quite obvious that most of the inflation is imported. This can be verified from increases in the average import price indices, which indicate that between 2006 and 2007, the following price increases occurred. For the section “Food”, the increase was 15.1 %; for “Oils and fats”: 42.4 %; for “Crude materials”: 7.8 %; for “Chemicals”: 6.4 %; for “Machinery and transport equipment”: 7.1 % and for “Miscellaneous articles”: 4.7 %.
Commodity prices have recently re-surfaced in discussions of the inflationary outlook for many economies, with oil price developments, in particular, being seen as a source of current inflationary pressures. Thus Core inflation rates are often considered a better measure of trend movements in aggregate prices than the overall inflation rate because it tries to eliminate high-frequency fluctuations.
EmploymentF. D. Roosevelt (1938),“Not only our future economic soundness but the very soundness of our democratic institutions depends on the determination of our government to give employment to idle men.”
‘000
Using the Continuous Multi Purpose Household Survey (CMPHS), the CSO estimates that unemployment rate would fall from 9.1 % in 2006 to 8.5 % in 2007. There would be an increase of 8,400 in total employment from 515,300 to 523,700. Out of these, foreign workers would increase by 4,900 from 16,700 to 21,600. Such a high annual increase in foreign workers is quite exceptional. In fact, the number of foreign workers has been decreasing from 18,200 in 2003 to 16,700 in 2006. But owing to a marked improvement in the textiles market, export enterprises, more dependent on foreign labour, have increased their production capacity and employed more people in 2007. Concerning employment of Mauritian labour, after an increase of 8,000 in 2006, the number of new jobs created in 2007 would be only 3,500. This in itself is not what can be called a good result. Moreover, it seems surprising how the level of unemployment can go down with this figure of new jobs for Mauritians. One partial explanation could be that the demand for jobs has contracted because more young people are going for tertiary education. Thus the number of students enrolled in tertiary education both locally and overseas increased by 4,368 in 2006 compared to an increase of 2,790 in 2005. However, from another angle, this does not completely account for the low increase of 500 in labour force in 2007 compared to 5,900 in 2006 and 11,200 in 2005. In fact, the results of the survey which the CSO now uses to make its estimates have still to be taken with caution. The CMPHS has still to prove that it is as reliable as the previous method. During the 4th quarter 2007, the primary sector provided employment to 9.5 % of the working population, which was similar to the 4th quarter 2006. Employment in the secondary sector, which is made up of manufacturing, electricity, water and construction, dropped from 33.0 % to 31.9 %. The tertiary sector which covers trade, hotels and restaurants, transport and all other services grew slightly from 57.5 % to 58.6 %
Public FinanceLerner (1943) “The size of the budget deficit and government debt does not matter per se; the budget should be assessed only in the light of its impact on the real economy.”
The 2007/8 Budget was a confirmation and consolidation of the reform started in 2006/7 with a view to better link spending with results, to allocate more funds for development and to contain public consumption. In this respect, Government task was not very easy because of the tight situation of the budget structure, with public debt servicing alone representing 25 % of recurrent expenditure. The main tax measures were the reduction of corporate tax and personal income tax to a flat rate of 15 %. On the other hand, Government introduced a special levy on banks after the one which was applied on hotels as from July 2006. The rationale behind this levy is that these sectors are the most flourishing and profitable and have the capacity to contribute more to public funds. The Minister of Finance also made a special appeal to large companies to increase their funds allocated to Corporate Social Responsibility to at least 1 % of profits.
Total revenue is expected to rise by 19.8 % from Rs 42.2 bn in 2006/7 to Rs 50.5 bn in 2007/8. As a percentage of GDP, it is expected to increase to 20.3 % in 2007/8 after a drop to 19.2 % in 2006/7. Total revenue comprises tax revenue, non-tax revenue and grants. Tax revenue would contribute up to 84.4 % of the total while non-tax revenue 9.8 % and grants 5.8 %. Tax revenue is expected to rise by 11.6 % from Rs 38.2 bn in 2006/7 to Rs 42.6 bn in 2007/8. It would thus represent 17.1 % of GDP in 2007/8, lower than the 18.1 % in 2005/6 and 17.4 % in 2006/7. In 2007/8 “domestic taxes on goods and services” would make up 66.4 % of total tax revenue compared to 66.9 % in 2006/7. These taxes are projected to rise by 10.7 % from Rs 25.5 bn in 2006/7 to Rs 28.3 bn in 2007/8 resulting from an increase in the following: Value-added taxes from Rs 15.5 bn to Rs 17.2 bn; excise duties from Rs 7.1 bn to Rs 7.7 bn and a slight increase in taxes on services from Rs 2.0 bn to Rs 2.4 bn. After decreasing from Rs 3.0 bn in 2005/6 to Rs 2.2 bn in 2006/7, Customs duties are expected to rise to Rs 2.3 bn in 2007/8. In 2007/8, taxes on “Income, Profits and Capital” are expected to represent 20.8 % of total tax revenue against 19.9 % in 2006/7. They are projected to increase by 16.5 % from Rs 7.6 bn in 2006/7 to Rs 8.9 n in 2007/8. This is due to a 29 % increase in individual income tax (from Rs 2.3 bn to Rs 3.0 bn) and a 4.2 % rise in corporate taxes (from Rs 5.3 bn to Rs 5.5 bn). Taxes on property are expected to contribute 7.3 % to the tax revenue, similar as in 2006/7. They are likely to increase by 11.8 % from Rs 2.8 bn in 2006/7 to Rs 3.1 bn in 2007/8. Non-tax revenue has been on the rise since its lowest level of Rs 2.5 bn in 2004/5. It is expected to grow by 36.4 % from Rs 3.6 bn in 2006/7 to Rs 5.0 bn in 2007/8. Total expenditure is expected to rise by 16.4 % from Rs 51.6 bn in 2006/7 to Rs 60.1 bn in 2007/8. After a drop to 23.5 % in 2006/7, total expenditure to GDP is expected to rise to 24.2 % in 2007/8. Current expenditure, which makes up 84.0 % of total expenditure (compared to 85.5 % the previous year), is expected to rise by 14.3 % from Rs 44.1 bn in 2006/7 to Rs 50.5 bn in 2007/8. The main factors affecting current expenditure are increases in the following items: “current transfers and subsidies” expected to rise from Rs 18.9 bn to Rs 20.9 bn; “expenditure on goods and services” from Rs 16.4 bn to Rs 17.5 bn and “interest payment” from Rs 8.9 bn to Rs 12.0 bn. Capital expenditure is expected to increase by 31.9 % from Rs 7.1 bn in 2006/7 to Rs 9.4 bn in 2007/8. Its contribution to total expenditure is also expected to rise from 13.8 % in 2006/7 to 15.6 % in 2007/8. The main items of capital expenditure are “acquisition of fixed capital assets” which is expected to grow from Rs 4.2 bn in 2006/7 to Rs 5.9 bn in 2007/8 and “capital transfers” from 2.8 bn to Rs 3.4 bn. The overall deficit is expected to rise slightly from Rs 9.4 b in 2006/7 to Rs 9.6 bn in 2007/8. But as a % of GDP, it will drop from 4.3 % to 3.8 %. It is noted that primary balance (overall balance less interest payment) will show a surplus of Rs 2.5 bn in 2007/8 compared to a deficit of Rs 0.6 bn in 2006/7. The overall deficit would be financed mostly from domestic sources.
Total public sector debt reached Rs 134 bn in June 2007, 3.8 % higher than in June 2006. However as a % of GDP, it dropped from 65.6 % to 61.3 %. Total public debt represen |
