Analysis : Win-Win

On 23 June 2016, 17.4 million Britons voted to leave the European Union, expecting their country to be no longer governed by EU uniform and onerous regulations, no matter whether the exit would be with or without a deal. The terms “hard or soft Brexit” were invented later when the government of Teresa May considered it appropriate to negotiate the terms of leaving. But to have a Brexit in name only would be seen as betraying democracy and the referendum.

An exit will eliminate the economic cost of belonging to a closed customs union with high tariffs and quotas. A hard Brexit, one without the UK Parliament having passed a Withdrawal Agreement, appears now the most likely outcome under the leadership of Boris Johnson. But the mainstream media has launched a fear campaign, tainted with alarmist speculations and hysterical denunciations, portraying a No Deal Brexit as economic Armageddon. Clearly, the fear-mongers are saying what might happen, not what will happen with certainty.

This miasma of make-believe has come to our shores. In an official document written in a flowery language, the International Affairs Division of our ministry of foreign affairs states that “with the knowledge of the Bank of England predicting a slump in the British Pound of the order of 25% in a No Deal Brexit, the British Pound may fall to Rs 34.12 (assuming a one-to-one relationship against the rupee.” This is the sort of over-reaction that the industry loves to provoke on the part of the government, in order to obtain a devaluation of the rupee. It reminds us of Keynes warning against “madmen in authority, who hear voices in the air.”

The figures of the Bank of England are not meant to be interpreted as the Bank’s view of what will actually happen if Brexit occurs on 31 October with no deal. The analysis of the Bank includes scenarios, not forecasts. In the worst-case scenario, the Bank is assumed to raise its benchmark interest rate to 5.50% to defend the pound. Sterling would then surely bounce back and remain on an even keel. Exchange rates tend to overshoot, but fluctuations should not be confused with trends.

It is public knowledge that, hard or soft Brexit, our government is eager for a weak rupee. As one respondent to our survey explains, “inflation is not currently driven by imported prices (for world oil prices are declining) but rather by our foreign exchange policy. In its last Budget, the government could not raise direct taxes or the value added tax as it is an election year. Since the VAT revenue increases automatically as goods and services become more expensive in rupee terms (even though foreign prices are stable or even declining), the government is allowing the rupee to depreciate in order to collect more revenue.”

The Economic Development Board also throws a tantrum when it asserts in a report that “exchange rate movements play a significant role in defining the magnitude of our economic relationship with the United Kingdom, especially for trade in goods and services, including tourism.” If the value of the rupee has really a “significant” bearing on our international trade patterns, then there is no purpose for Mauritius to sign free trade pacts.

The UK government has already concluded a trade deal with Mauritius through the Eastern Southern Africa-United Kingdom Economic Partnership Agreement, which will kick in after the UK leaves the EU. The Mauritian stance of focusing primarily on duty free access to the UK market for preserved tuna, sugar, textile and rum exports does not constitute justification for sweeping serious problems under the carpet if we are to take advantage of Brexit. Any viable export company needs scale and capital, and therefore requires a new funding ecosystem that goes beyond traditional debt funding.

As our survey respondent points out, “Mauritius being such a small trading player, re-routing orders away from traditional EU sources to non-EU sources is not easily achievable for UK importers mainly because of the logistics involved. Also, what else could we export to the UK? Mauritius needs first to revive its manufacturing sector before dreaming of benefiting from a no-deal Brexit.”

Our analyst comments further: “Surf, sand and sun as a package is no longer a sales point as better destinations are now available with cheaper rates. The absence of a dynamic tourism policy during the past five years, seeking out new markets and offering new products, is one of the major causes of the decline of the Mauritian destination as an attractive proposition. The industry has been in a state of shock since before 2014. It needs an urgent rethink.”

The same is true with our foreign direct investment policy. It is currently geared towards real estate, encouraging villa sales mainly to Europeans looking for resident permits in order to save on taxes. This is a secular trend which is, however, limited by the remaining land in good locations to house them.

In case of a No Deal Brexit, the conservative government may drastically reduce the income tax rate for foreign companies setting up in the UK. In addition to the lack of depth of financial skills in Mauritius, we do not have the fiscal manoeuvre to compete with the UK financial centre because of our agreements with the OECD, the IMF and the EU. Unless the EU imposes some special tax prohibiting its members from utilising UK firms, the City of London is unlikely to be much affected by a hard Brexit.

What represents a golden opportunity for the UK should not be a threat to Mauritius but a win-win situation.