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Analysis : No false promises

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So our minister of foreign affairs is ashamed of the country’s economic growth. Yet he forms part of a government that has promised a “second economic miracle”. They have not even been able to achieve a 4% growth in the past four years, and 2019 will not be different. Textile firms are laying off people or closing down, tourism arrivals by air are decreasing, and the offshore sector is struggling for its survival. These are enough for the mood of economic operators to darken as the Prime minister and minister of finance is gearing up for another spending spree. Despondency is creeping into the business climate against expectations of an electoral budget that would do more harm than good to the economy. With the exports of goods and services on a declining trend, a 3% growth could become the new normal for Mauritius.

The Mauritian textile sector has been under a lot of strain in recent years, suffering from lack of skilled labour, from excessive debt resulting in heavy financial charges, from an unfavourable real effective exchange rate of the rupee (appreciation of the rupee not in line with inflation differential), from chronic under-investment (capital input fell at an average annual rate of 3.1% in the period 2007 to 2017) and from increasing labour costs not matched with productivity gains (over the same time span, average compensation of employees rose by 6.8%, twice the 3.4% growth rate of labour productivity).

It is untrue to say that successive governments have done nothing to keep the industry afloat. But the incumbent one has implemented one thing that adds to the industry’s woes: the national minimum wage. When the price of labour is fixed above the market-clearing price, it can only misalign the supply and demand for labour. It is noteworthy that, in the nine months that followed the introduction of the minimum wage (January-September 2018), the textile and apparel sector shed 2,272 employees, compared to only 13 job losses in the corresponding period of 2017.

Obviously wage rigidity is impacting negatively on manufacturing exports, making them even less competitive. It is not only a financial issue. As one respondent of our present survey puts it, “with the securing of the minimum wage, even the Bangladeshi workers are reluctant to do overtime! As it is, the textile industry in Mauritius is dead. When people are quipping, speaking of innovation and creativity in the factories, they have just been reading books. An innovation culture is not something that is done overnight and on a standalone basis, but there must be an ecosystem in place!”

Also in the doldrums is the offshore sector where jobs will be made redundant. In the face of the changes in the Mauritius-India double taxation avoidance agreement (DTAA) that will take effect on 1st April next, capital inflows have begun to ebb away. Our balance of payments indicates that income generation stemming from the global business sector shrank to Rs 60 billion in the third quarter of 2018 from Rs 72 billion in the corresponding quarter of 2017. The future looks bleak for this industry, at least in the short term amidst the evolving operating environment, but it can be quite promising if we move towards more value added services and away from plain administrative duties. As long as there is a need for tax arbitrage, no financial exchange controls and a seamless financial system, the country can find its way as an international financial centre.

Among our survey respondents, an economist assures that “the sector has the potential to remain a key driver of the economy provided that the authorities adopt judicious measures to adjust the business model of the jurisdiction, and that operators undertake concrete actions to diversify their activities.” Otherwise, warns another analyst, “we will continue to do well in accounting jobs with foreign fund administration companies, but we just do not have the right people with proper experience at the policy making level who understand how Mauritius can transition from back office to front office. The regulators do not have a clue, the advisers are learning on the job, and the new Mauritius-India DTAA coupled with early adherence to OECD guidelines will be a challenge.”

As a result, “Mauritius will lose market share to Singapore and to jurisdictions that offer all services, as the cost differential is low enough now. Singapore has major international banks and a well developed capital market base along with the network that comes with investing in India. London and South Africa will continue to dominate in Africa with regard to value added services. Africa sounds nice but we do not put our skin in the game, beyond offering uneasy African businessmen a stable place to park their money and a few fund structuring advantages.” Africa is still small and too risky as compared to India.

Mauritius is yet to show a competitive advantage in debt structuring. African and Indian companies will issue debt where there exist demand, liquidity and large investment banks. Just listing bonds on exchanges is not enough to create liquidity and to attract issuers. Also, according to an analyst, “we do not have the necessary local expertise. Debt structuring requires advanced corporate finance and investment banking skills, expertise in foreign exchange markets and ability to forecast interest rates movements and financial futures.”

No government can promise a bright future for people in the textile and offshore activities. The forthcoming national budget had better take inspiration from this slogan of a commercial shop: no false promises.

www.pluriconseil.com

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