Global Financial Crisis and Policy Response in Mauritius:

Key Lessons

Presented by Sunil Benimadhu

Chief ExecutiveStock Exchange of Mauritius

The North-South InstituteSheraton Hotel

OttawaJune 8-9, 2010

Presentation Outlinen A brief introduction to Mauritius

n Preemptive reforms during the 2006-2008 period: creating the necessary fiscal space to face the crisis

n The threatening Global Crisis

n Key short-run response to the crisis

n A few lessons from the crisis

n The Euro-crisis and its likely impact on Mauritius

Brief Introduction to Mauritiusn A small island of 1.3 million people with a 550 k

labour force.n An annual GDP of about USD 9 billionn One of the fastest growing economies of Africa –

averaging 5% + during last forty yearsn Size of domestic economy requires leveraging of

external markets to sustain growthn By construction, Mauritius cannot be insulated

from developments in the global economy

Mauritius: from a Doom scenario to a Glittering one

PRE-INDEPENDENCE YEARSn mono-crop agricultural economyn no scope for a manufacturing basen per capita income less than USD 200n rapidly growing populationn high wealth and income inequalityn high unemploymentn susceptible to ethnic tensions

AVERAGE: 1970-2010 5.4%

Mauritius: from a Doom scenario to a Glittering oneDEVELOPMENT EXPERIENCE GDP GROWTH %

1960USD 200

1980USD 1050

2000USD 3300

2010USD 7000

2020USD 15000

PER CAPITA INCOME

Mauritius: from a Doom scenario to a Glittering one

CHALLENGES IN EARLY 2000Sn Unfavourable International Situation

§ Increased competition with globalisation§ Soaring energy prices

n Sectors losing preferences§ Dismantling of Multifibre Agreement§ Sharp cut in sugar prices

n Macroeconomic situation deteriorating– Growth on declining path – Low job creation resulting into rise in unemployment rate – Deteriorating ToT

n High burden of Incentive Framework– Welfare State becoming unaffordable– Pension system is unsustainable– Incentives favour capital intensive, low productivity sectors– Service quality is low and cost high in public utilities, particularly ICT– Bias against micro-enterprises and SMEs– Lack of skilled and semi-skilled workers to power new sectors– Insufficient and ineffective training programs for low income groups, unemployed and

new entrants

Mid 2000S – Need for A New Development Paradigm

Failure of Model based on

Trade and Tax Preferences/ Incentives

Failure of Model based on

Trade and Tax Preferences/ Incentives

To Return To High Growth, Government Resorted to A Four Plank Reform Programme…n Fiscal Consolidation and Improved Public Sector Efficiencyn Improving trade competitivenessn Improving the Investment Climaten Democratizing the Economy through participation, social

inclusion and sustainability.

2006-2008: Key Reforms to put Mauritius back on the track of sustainable growth

Shift from Trade Preferences to

Global competitiveness

Shift from Trade Preferences to

Global competitiveness

n Greater openness/attracting foreign capital, skills, talents, expertise, ideas

n Simplified business registration processes

n Eased entry of skilled workers – fast track residency/work permits

n Silent agreement principles

Doing Business Environment

Enhancing Competitiveness Enhancing Competitiveness

Fiscal Consolidation

Solidarity

n Targeted social safety netsn Empowerment programmen Social housingn Education & Healthcare

n From job protection to worker protection

n Flexibility n workfare

n Tariff reduction n Air access liberalisationn Immigration restrictions easedn Broadband internet cost reduced

n Low flat income tax rates of 15% n Tax expenditure and Tax

Administration reformsn New Debt Law and Fiscal Rules n Implementation of PBB n Further Development of PSIP

Framework n Public Financial Management n Procurement Framework

Labour ReformsLabour Reforms

2006-2008: Key Reforms

ACHIEVEMENTS2001-05 2006-10

Economic Growth (Ave.) 3.7 4.7Investment Rate (Ave.) 22.0 24.9Per Capita Income $4,600 >7,000FDI (Rs bn) (Ave.) 1.1 10.0NIR (Rs bn) 63.3 105.7

weeks of imports 32 48PSD % of GDP (Ave) >70% 01/02 to 05/06

<60 % 06/07 to 09

n Economy on a higher growth path -6.8 % in 2007/08 (pre crisis period)

n Unemployment rate declined to decade low and job creation on a net basis to all time high in 2008 and positive in 2009 (in spite of crisis)

n Improved fiscal Space and reduced external vulnerabilities

n Productive sectors more competitive

ACHIEVEMENTSn Improved international Rankings

– 2009 Index of Economic Freedom [18th (world) and 1st (Sub Saharan Africa)

– Ease of Doing business – 17th world and 1st in SSA

– Index of African Governance and Mo Ibrahim Index – 1st in Africa

– Economist Political Instability index – 7th most stable country in the world (158th out of 165 countries)

BASIS OF SUCCESSn Broad Based Reforms n Favourable Climatic Conditionsn Strengthened supports from Development

Partners n Timely and successful reformsn Political Commitment and Stabilityn Strong public and Private sector participation n Good Governance

Impact of Reforms

Short Term improvement in Macroeconomic performance Short Term improvement in

Macroeconomic performance

Stock Market Performance (2006-2008)

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Global crisis and its impact on some key outward – looking sectors of the

economyn Global crisis triggered slowdown of some key

sectors of the economyn Textile sector, after undergoing successful

restructuring in the context of the phasing-out of trade preferences, grew by 8.5% in 2007, but slowed to zero % in 2008 and -4% in 2009.

n Tourism sector 14% in 2007, declined to 2.6% in 2008 and -5.3% in 2009

n The Construction sector by 15.2% in 2007, 11.1% in 2008, but decelerated to 6.5% in 2009

Stock Market Performance

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Global crisis and overall economic performance

n Overall economic performance did not collapsen GDP growth was 5.1% in 2008, 3.1% in 2009 and was,

until recently, projected to reach 4.6% in 2010n The above numbers are not far from the historical 5%

average rate and fairly strong given the gravity of the Global crisis

n Unemployment rate increased only marginally by 0.1% to 7.2% between 2008 and 2009

n Macroeconomic instability and exchange rate problems avoided as international reserves displayed positive growth and fiscal deficit was kept below 5% of GDP in 2009

Resilience of Mauritian economy to 1st

phase of Global crisis: key underlying factors

n Resilience of the Mauritian economy was not created overnight by immediate response to crisis

n Neither was it the result of a simple replacement of private sector demand with public spending

n Resilience can be understood as a combination of four factors:Ø Reforms to sustain long-term growth which accelerated in 2006Ø Timely, targeted and temporary short-run response to the crisisØ Institutional arrangements that promoted private-public sector

collaboration and formalized a social contractØ Strong partnership with development partners

Short-Run Response to Global Crisis

n Coordination between monetary loosening and fiscal policy stimulus was timely and calibrated

n Key repo rate slashed by 250 basis points within a six-month period from -% to %

n Government announced a Rs 14.5 billion (about 5% of GDP) stimulus package focusing on: Ø Accelerating infrastructure investment projects crucial for long-

term economic growthØ Investment in human capitalØ A social contract to preserve employment whilst facilitating

restructuring of firms and upgrading of skills; via the Mechanism for Transitional Support to Private Sector (MSTP), known as the Mauritius Approach.

Short-term Response: The Mauritius Approach

n Mauritius approach: The Mechanism for Transitional Support To the Private Sector• Government/bank/enterprise working together on

restructuring plan : 40-30-30 financing • time bound support from government – 5 yrs• no dividend payment & control of bonuses until

government investment has been fully paid• No lay offs , except where absolutely necessary • Only x firms that are viable qualified/ x applications

rejected• Training for retrenched workers

Overall impact of short-term responsen Growth of 3.1 percent despite shocks: Maintained confidence of

consumers and investors and avoided vicious spiral to cut spending and aggravate recessionary impact

n Fiscal reforms and contingency planning amplified impact of stimulus (no Ricardian equivalence)

n Saved some 7,500 jobs (1½% labor force) but allowed non viable enterprises to close (2,500 jobs)

n Reforms and confidence resulted in net job creation: unemployment up only slightly (about 0.2 percentage points)

n Saved dozens of enterprises on the edgen Consolidated the resilience of the economyn Protected some thousands of vulnerable families n Improved infrastructuren Built credibility at the international level

Stock Market Performance

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STOCK MARKET PERFORMANCE: APRIL 09 TO DECEMBER 09

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n Fiscal Stimulus – what Timing for Exit

n Fiscal consolidation without risking recovery

n Institutional reforms to better manage crises?

n Improving competitiveness at global stage

n Improving Infrastructure

n Preparing to meet the cost of ageing population

n Improving further the social protection system through the Social

Register for Mauritius

n Sustaining financial sector and structural reforms

Short and Medium Term Challenges

n Need to have Contingency Plans to address crises

n Countries with Fiscal Space are better positioned to manage crises

n Timely, Targeted and Time bound stimulus measures do contribute in

mitigating impact of crisis and at easing exit strategy for stimulus

n Role of Development partners Critical

– EU unlocking/frontloading budget supports– New instruments i.e., VFLEX

n Need to address global imbalances

– Savings /investment gaps between key economic players i.e., US, China

Lessons from the crisis

The Euro-crisis and its likely Impact on Mauritius

n Export sector of Mauritius very Euro-centricn > 60% of exports are Euro & GBP denominatedn > 75% of services (ICT & Tourism) are Euro & GBP

denominatedn Dwindling Euro constitutes major risk to export

competitiveness & to key sectors like textile & tourismn Mauritian economy confronted to double-whamming-

dwindling export/services earnings & rising import costs due to appreciating USD

n Growth expected to dwindle from 4.6% to < 4% in 2010n A joint Private sector / Government / Central Bank task

force set up to address this fundamental threat