Budget Synopsis 2016 - 2017

Domestic Economic Outlook
Inflation in Mauritius remains at a low level, supported by moderate international commodity prices, weak global economic activity and broadly favourable domestic food supply conditions. Headline inflation retreated from 1.3 per cent in January 2016 to 0.9 per cent in June 2016.

Beginning 2016, the domestic economy has embarked on a solid growth footing as growth came in at 3.7 per cent in the first quarter of the year, driven principally by steadfast growth in household consumption and a significant increase in government expenditure.

Investment and Savings continue to remain at low levels, when measured as a percentage of GDP, at about 17 and 11 per cent respectively at end-2015. Private investment, the main component of total investment, stood at a lacklustre level in 2015.

The economy continues to be characterised by a current account deficit in 2015. The contribution of net exports to growth remained negative in 16Q1.

Statistics Mauritius and the Bank of Mauritius forecast GDP growth to pick up to 3.9 per cent and 3.8 per cent respectively in 2016, from 3.0 per cent for 2015. Government consumption and investment are expected to drive the economy in 2016 as public capital spending and procurement are projected to increase significantly due to the implementation of various infrastructure projects.
The rupee firmed against the three major currencies, reflecting the continued inflow of capital in the domestic economy as well as developments in major currency markets.

Global Economic Outlook
The World Bank forecasts global growth for 2016 at 2.4 per cent, same as in 2015. Growth continues to weaken in advanced economies while emerging market and developing economies are experiencing numerous challenges, notably more subdued economic activity in advanced economies, tighter financial conditions, low commodity prices, sluggish world trade and capital flows.

Major global multilateral institutions have revised downwards their estimate of global growth.

The UK’s decision to leave the EU after 43 years of membership has sent wave shocks throughout the globe, thereby constituting a major headwind for global growth. While the overall macroeconomic implications of Brexit are still being assessed, what is certain is that economic uncertainty will continue to plague financial markets and global growth recovery for some time.

Following Brexit, a turnaround in monetary policy stances across the world is emerging, with many major Central Banks committed to relax their monetary stances.

Until the materialisation of the ”brexit shock” in June 2016, currency markets have largely reflected divergent monetary policy stances among the major Central Banks.

Budget Analysis
Presented against a backdrop of lackadaisical outlook for global recovery – especially with the onset of the ‘Brexit’ shock in June 2016, uncertain growth prospects in the developed world and tumultuous episodes for global financial markets, the 2016-17 budget contains a number of bold measures designed to help catalyse the main drivers of economic growth, buttress the key pillars of economic development, and prepare the island step into the bandwagon so as to achieve the 2030 vision established by the incumbent government back in 2015. Has the budget met expectations? Will the 2016-17 budgetary measures be successful in meeting the economic objectives?

At a time when domestic challenges – as witnessed by the ongoing bouts of political turmoil have been grafted to external challenges, and have coalesced to eke out the nadir of the incumbent government’s notoriety, a socio-economic re-engineering was long beckoning. In that realm, the finance minister has made no qualms in ensuring that ‘feel good’ measures are taken. While measures such as reduction in cooking gas canister prices is welcome by the population who feel dis-empowered by the relatively high living cost despite low inflation figures. In fact, taking a peek at global prices of fuel and oil-related products which has been falling since 18 months, many analysts have felt that the reduction announced by the Finance minister was long overdue and clearly not a favour. In the same spirit, the hikes in prices of cigarettes and alcoholic drinks through customs duties, in the spirit of the infamous Ramsey rule of taxation, may contribute towards filling revenue coffers. As such, in the absence of tax base drains, the government can be reassured that its revenue will be secured, especially since excise duties have been removed from some 368 tariff lines. The relative dependence of the government on its various income sources (VAT, excise duties, income and corporate taxes, and a sleuth of license fees and other fees) has remained unchanged after the 2016-17 budget.

With the objectives of a prudent and fiscally responsible budget, ensuring sound expenditure management and quality control are key behind containing expenditure figures. Thus, re-engineering the expenditure composition part was largely anticipated. In a climate characterised by low investment as a percentage of GDP and by huge opportunity costs represented by structural unemployment in the economy, lowering the debt to GDP ratio to 50 per cent by 2018, requires quality and accountability on expenditure composition, while not pre-empting the capital budget. At present, the investment to GDP ratio stands at 18 per cent. To achieve the ambition of turning the island into a high income status one, it should hover around 25 per cent. While a number of public project implementation programs have been announced, two observations can be made: first, the current public sector investment program budget is devoid of ambitious growth-enhancing measures that can help towards stimulating investment to levels of 25 per cent; second, many of these large-scale public infrastructure programs can be implemented by the private sector through various forms of public-private partnership arrangements, such as competitive concessioning, build-operate-transfers, and other forms of contractual arrangements.

The savings rate continues to remain alarmingly low in Mauritius. The 2016-17 budget remained silent about measures that can be taken to increase the average savings rate over the incoming years. In the absence of real growth-enhancing measures designed to fast-track our transition into high-income status and in the wake of the Bank of Mauritius’s recent cut in repo rate to 4 per cent, it is unlikely that savings rate as a percentage of GDP will ratchet up. Given the ubiquitous surmise in economic theory that savings are a pivotal contributor towards long-term growth rate, this may raise eyebrows among experts and international institutions the World Bank and the IMF since an unsustainable real GDP growth rate in the incoming years may unsettle the medium-term goals of achieving medium-term debt to GDP ratio of 50 per cent by 2018.

Implementing a myriad of measures to address the multi-hooded poverty problem and to advocate welfare-enhancing measures for the disabled, is a boon to help tackle inequality problems arising and achieve the inclusiveness goal established by the government in Vision 2030. However, despite having a social register, the authorities have still failed to come up with concrete plans to adopt targeting measures, as prescribed by international organisations such as the World bank and the IMF, to ensure effectiveness in allocation of welfare state and to ensure that the arsenal of distributive measures is really earmarked towards those who are in real need.

On employment creation, the creation of a national employment agency may help address labour market mismatches, by disseminating higher quality information to potential job seekers. While this constitutes a palliative measure to help hammer the unemployment figures downwards, it does not really address the fundamental structural mismatch issues plaguing the labour market in Mauritius. A big chunk of unemployed in Mauritius comprises the youth and is of female gender and educated. The 2016-17 budget did not propose new growth-enhancing sectors that can really meet the job aspirations of these educated unemployed. In the absence of newly-created sectors, structural unemployment is bound to resurface at a higher level when new entrants into the labour market outweigh those who are siphoned off through youth employment program schemes. Furthermore, in the absence of a real annual growth rate that can catapult the country into high-income category, any cyclical unemployment will morph into hysteresis, or unemployment persistence that fails to correct itself when the economy settles into comfortable growth trajectory in the offing.

An assessment of the impact of the main budgetary measures on the macroeconomic outlook picture can be subsumed as follows:

Impact of Main Budgetary Measures on Macroeconomic Outlook Picture

1. Real Growth rate
Budgetary impact on real growth rate positive for 2016/17 but more likely to be less than 4.1 percent announced.

Announced measures designed to (e.g., cuts in retail price of cooking gas (which is demand-elastic) and various measures designed to empower the dis-enfranchised) will most likely be a catalyst for consumption, given that the categories that will benefit the most from these rebates are those with relatively high marginal propensity to consume.

Investment as a percentage of GDP has grown by a tiny proportion from 18 per cent in 2015/16 to 18.9 per cent in 2016/17. Savings rate in Mauritius as a percentage of GDP remains at around 12 percent.

To escape the ‘middle-income trap’, investment rate as a percentage of GDP must hover around 25 per cent.

2. Inflation
Measures designed to:
  • Cut retail prices of cooking gas (weight: 14/1000)
  • Increase excise duties on tobacco and alcohol (weight: 86/1000)
  • Reduction in excise duties on clothing and household equipment (weight: 57/1000)
will likely increase inflation rate by about 1 percent, when taking into account the relative weights of the CPI basket.

3. External Situation
Measures designed to boost up investment level (especially through capital expenditure) are likely to lead to an increase in imports of goods over the medium term.

Given the in-elasticity in the demand of items such as cigarettes and alcoholic drinks, a custom duty will raise the value of these imported items.
The impact of abolition of customs duty on some 368 tariff lines on their imported values will depend on their relative elasticities.

Thus, the Current account deficit may worsen in the absence of significant increases in exports of goods and services (the latter is projected at 48.2 per cent in 2016/17, a fall of 0.2 per cent over the past year).

With projected increase in current account deficit over incoming years, coupled with projected increases in international reserves level, the gap which will is most likely to be met by projected increases in foreign investment, may contribute towards excess liquidity in the banking system.