Economic Headwinds

The bull should be taken by the horns if we really want to face the challenge posed by the current weakening of our global business sector

On 10th May, the government signed up a protocol amending the principal clauses of our Double Tax Avoidance Agreement (DTAA) with India. The overall impact of the amendments due to take effect as soon as the two countries have ratified them has been judged to be negative for the economy.

The first signal of this impending negative impact was given by the International Monetary Fund (IMF) in its latest Article IV Consultation Report released in March 2016. The IMF stated, amongst others, that “the authorities face macro-financial challenges stemming from the recent collapse of a large financial conglomerate, which affected the real economy, as well as risk exposures and potential spillovers from the massive offshore sector and its sizeable inter-linkages with domestic banking activities. These challenges, discussed in the FSAP and in the consultation as a macro-financial pilot, require a significant strengthening of the macro-prudential and financial stability policy frameworks.” The IMF must have been aware of the amendments our July 2015 official delegation to India with regard to Treaty negotiations had already conceded to, which surfaced up on 10th May 2016.

The second signal was from Moody’s, an international rating agency which provides a rating to Mauritius and is involved in the rating of our two principal domestic banks, the MCB and the SBM. Moody’s stated, after the amendments to the DTAA were made public: “The taxation agreement is credit negative for Mauritius because its financial centre will be a less attractive platform for investing in India than it used to be.

“We estimate that a curtailment of new investment flows through Mauritius would cause a deterioration in the balance of payments equal to 1%-2% of GDP annually, and consequently put pressure on Mauritian foreign exchange reserves. However, a sharper shift in investor sentiment would have more dire consequences.

“Mauritius’ financial industry is a key economic pillar and the primary source of net financial inflows from abroad. The tax changes will particularly weaken Mauritius’ balance of payments, consequently increasing its external susceptibility.”

These are not views coloured by political partisanship. Nor are the two views reflective of the sombre mood that has caught on in the Global Business sector of Mauritius after the Treaty amendments, despite the appearance of “not-totally-disruptive amendments” adopted by some in the sector in a bid not to forestall the pessimism it may have sparked off among clients and prospective clients of Mauritius.

For all practical purposes, this is a done deal and India should not be expected to come back on what it has been able to secure by overturning the Treaty provisions with our help. The question for us is therefore to address the external vulnerabilities which, as pointed out by the IMF and Moody’s, take concrete shape and may likely accentuate over time.

Data show that so far our overall external balance of payments (BoP) has remained positive. Annual BoP surpluses have ranged from Rs 5.2 billion in 2011 to Rs 23 billion in 2014. The surplus was lower at Rs 20 billion in 2015, possibly due to falling levels of FDI. Should the BoP surplus deteriorate in coming years due to a shrinking, amongst others, of our Global Business contribution by way of its reduced foreign exchange earnings, we will have no alternative than to compensate for it. This can be done by increasing the range of our export activities for both goods and services.

But when we look at our external trade data for recent years, traditional merchandise exports other than jewellery-related activities have barely increased in past years. In fact, exports of Export Oriented Enterprises have come down in 2015 compared with 2014 by about a billion rupees. Other merchandise export activities have more or less stalled at about the same level in both years. Our total exports were Rs95 billion in 2014, Rs 94 billion in 2015 and are estimated at Rs 95 billion in 2016. The result is a trade deficit (exports minus imports) of Rs 77 billion in 2014, Rs 74 billion in 2015 and an estimated Rs 76 billion for 2016. We have been able to pay up for such continuing merchandise trade deficits with the inflow, amongst others, of FDI in the economy but also by sustained earnings from the services sector (travel, tourism, international financial services) and net international transfers in our favour.

Management Companies (MCs) earn foreign exchange from the Global Businesses they manage and thus contribute to bridge the gap occasioned by the recurring trade deficit. According to statistics from the Financial Services Commission, they generated total income amounting to US$ 190 million in 2013 and US$ 206 million in 2014, paid US$49 million and US$ 53 million to their employees in these respective years. They generated total profits of US$ 51 million in each of 2013 and 2014, the last for which we have data, and paid tax to the MRA of US$ 8.9 million and 9.8 million respectively in these two years. Given the scale of their contribution in these various compartments of our economic life, the IMF and Moody’s are drawing attention to the potential setbacks the economy will suffer as a result of the change of the DTAA provisions.

It will take some time before our global business sector will recover especially in the event the changes recently brought to the DTAA were to produce an internationally uneven playing field, in which some countries’ global businesses will divert to themselves clients who had so far been dealing with Mauritius. So, the best thing we could do is not to alienate the sector but rather to give it a boost by opening up newer markets and helping it do actual business in those places.

One does not have to treat the sector unceremoniously as if it is guilty of whatsoever. Quite the opposite. It should be supported to make a deeper discovery of its potential – as it has been the case for places like London, New York, Luxembourg, etc. – even if that meant drawing in investors from India to other newer places with which we successfully establish better business links. We were instinctively looking to outside expertise to improve the range of activities of the sector when we were first beset by the tracasseries from India. We should more than ever before look to making innovative breakthroughs for the sector, with the assistance of all parties.

We pointed out earlier the want of growth of our traditional goods and other services markets of late. No doubt, the current global economic situation is contributing to the slack. What the situation demands is less of loud and vain talk but more of action to open up newer external demand-driven activities from our economic agents as an intermediate processing centre for exports. We have to associate ourselves with global producers at varying scales of production and the expertise they bring along with them.

Here again, we need outside expertise and a planned approach to development, with sustaining strategy behind it. Other places have shown that they can produce for global markets in competition with the manufacturing giants of the world. We have to look intently in a similar direction. An economic restructuring is long overdue, to move away from defensive positions such as those adopted by the IMF and Moody’s in the aftermath of the recent Treaty protocol.

Complaining about the harm that has already been sustained will do nobody any good. The bull should be taken by the horns if we really want to face the challenge posed by the current weakening of our global business sector.

* Published in print edition on 20 May 2016