Anthony Leung Shing
Country Senior Partner, PwC Mauritius
The country has an enormous challenge ahead with high unemployment, mounting debt [...] These will be difficult trends to reverse!
We can only hope that the Government pushes ahead with the transformation agenda in order to create a better tomorrow.
The coronavirus outbreak has brought the world to a standstill, and its impact on Mauritius will be devastating in 2020: an economic recession of -5.8% of GDP, unemployment at 17% (153.7% increase) and a 270% hike in the budget deficit to Rs64bn. In addition, the level of sovereign debt will jump significantly from a forecast of 61.6% to 83.4% of GDP (under the old definition). What a challenging context for the Minister of Finance, Economic Planning and Development to present his first budget! The Covid-19 Act (enacted only a month ago) has already provided a series of measures. For this Budget 2020-21, did the government simply throw more money at the economy? Or did it reveal a clearer plan for an economic revival?
Given the global downturn, the expectation was that there would be little room to manoeuvre but, interestingly, the Minister will neutralise the budget deficit for 2020/21.
Figure 1: Budget Deficit
However, this balancing act will only be possible with the exceptional contribution from the Bank of Mauritius of Rs33bn and Rs27bn to meet recurrent and capital expenditures respectively, as well as an additional Rs33.7bn transfer from reserves. Recurrent expenditure will be reduced by 6.1% and this is mainly attributable to a fall in subsidies of Rs6bn, while two of the biggest costs (employee compensation and social benefit) remain relatively unchanged. Cost cutting is the norm in times of crisis, and we are disappointed that little sacrifice has been made by the public sector, with over Rs66.7bn of exceptional funding being required to fund recurring government expenditure.
The Government plans to inject an overall amount of Rs100bn (9% of GDP) into the economy and this COVID-19 war chest is comparable to countries like Singapore or USA. However, the size of the war chest does not necessarily determine the magnitude of the economic containment. For the countries selected (refer to Figure 2): Mauritius has the fifth largest war chest, but the projected unemployment rate would be the second highest and, at -7% GDP growth, Mauritius would be the least impacted economy. Unemployment is a key concern and the fairness of the distribution mechanism for government support will matter most.
Figure 2: COVID-19 warchest
The Minister addressed the issue of fairness and equity by replacing the National Pension Fund with a new participative and collective pension system (effectively, removing the pension ceiling), and increasing the solidarity levy from 5% to 25% for higher income earners. In addition, a new levy of 0.1% or 0.3% (subject to business activity) is being introduced for large companies with gross income over Rs500m. Mauritius competes to attract highly skilled professionals or fast growing companies, and such measures can be a major obstacle. With the introduction of the higher solidarity tax, Mauritius (25% for a high-income earner) finds itself as a high tax country similar to the UK (27.5%) compared to 9.7% for Singapore (refer to figure 3). Furthermore, with different incentives schemes (including zero tax) available for foreign nationals or returning diaspora in Mauritius, this may disincentivise the local workforce.
Figure 3: Effective Tax Rate (Personal Tax @ Annual Salary: Rs5m)
At PwC, we have always maintained that the role of government is to facilitate a conducive business environment and it is for the private sector to take risks. With the private sector in need of momentum, we are pleased that the Government will use PPP to help boost economic activities and contain spending. Whilst we acknowledge that government intervention is needed in this unprecedented crisis, we remain concerned of the risks taken by the Mauritius Investment Corporation Ltd in bailing out companies in distress, or investing in projects in Africa. At this stage, we are yet to understand the safeguards that the Government will put in place to protect and guarantee a return on such ventures.
As countries tightened border controls, the pandemic forced a rethinking of the sustainability of an export-led economy. We welcome the Government’s plan to encourage local production, diversify into strategic sectors, as well as promote sustainable development. With little domestic production, the multiplier effect into the local economy is reduced with money being flushed out overseas through imports. By promoting the buy local ‘Made in Moris’, more value transformation will occur locally, more jobs created and leading to an economic revival (refer to Figure 4). Further, with the Government’s drive to promote technology, innovation and sustainability, the country will be more competitive and productive in the longer term.
Figure 4: Multiplier Effect
Whilst the full impact of this pandemic remains unknown, it appears that Mauritius may be able to contain the COVID-19 GDP impact better than others. However, the country still has an enormous challenge ahead with an economy in recession, high unemployment, mounting debt, and an excess supply of money in circulation. These will be difficult trends to reverse, and the path to recovery in certain sectors such as hospitality and manufacturing remains unclear. Amidst this turmoil, all economic stakeholders need to pull together to ride this crisis and we can only hope that the Government pushes ahead with the transformation agenda in order to create a better tomorrow.
Entretien accordé à Villen Anganan pour L'Express - mai 2020
Anthony Leung Shing situe l'enjeu du premier exercice budgétaire du ministre des Finances et donne des pistes quant à sa marge de manoeuvre. Il note au passage qu'avec une contraction de 10% du PIB, il faudra s'attendre à un déficit budgétaire de Rs 28 milliards...
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Anthony Leung Shing
Country Senior Partner, PwC Mauritius
Tel: +230 404 5071