Bank of Mauritius Annual Report: Mauritian economy facing three major challenges

“There is a need to consolidate the foundation underpinning the Mauritian financial sector and the importance of safeguarding its safety, soundness, attractiveness and resilience.” This statement forms part of the observations of the staff of the Bank of Mauritius in its annual report published on Thursday.

“The Bank has embarked on a multi-pronged strategy to improve the efficacy of monetary policy, to upgrade the regulatory and supervisory framework in view of keeping up with fast-evolving standards in the global financial industry, and modernising the domestic financial market infrastructure,” read the report. In this context, major projects pertaining to the implementation of a National Payment Switch System and Deposit Insurance Scheme are ongoing.

The annual report gives a broad outlook of the economy and major challenges noted during the year. According to the Bank of Mauritius, the domestic economy is subject to the vicissitudes of a number of key risk drivers, namely (a) the fallouts of Brexit, (b) prospects in the global business sector stemming from the revisions to the Double Taxation Avoidance Agreement (DTAA) with India, and (c) structural supply-side bottlenecks. 

“These factors represent sources of downside risks to economic growth. There is still ambiguity regarding how Brexit will affect growth trajectory in the UK and in Europe. Moreover, the imbroglio persists about the shape of future trade agreements between the UK and Europe, and between the UK and the rest of the world,” said the Bank’s Governor, Mr. Ramesh Basant Roi.

In the very short term, the sharp depreciation of the Pound sterling will impact on exports of Mauritian goods to UK (which represent around 12.5 per cent of our exports) and on earnings from British tourists (UK tourist arrivals represent around 11 per cent of total tourist arrivals). Out of total exports, excluding re-exports, a proportion of 6.5 per cent is invoiced in Pound sterling while 58.7 per cent is denominated in US dollar. 

“If the Brexit phenomenon results in negative spill-over effects on Europe at large in the medium term, the odds will be high that our economy will catch the cold, given its relatively high degree of euro-centricity,” warns the Governor.

DTAA with India

On 10 May 2016, Mauritius signed a protocol with India to amend the Double Tax Avoidance Agreement (DTAA) between the two countries. The initial fears in the financial industry that this would be a severe blow to the jurisdiction has subsided to some extent, according to Mr. Basant Roi. Looking ahead, however, the mass of businesses generated on the basis of the DTAA could suffer in the absence of further compelling actions to innovate the business models that the sector has embraced for years.

Since the announcement of the General Anti-Avoidance Rule (GAAR) by India in 2012 and protracted debates heralding the amendments to the DTAA, domestic banks had started diversifying their deposit base and asset exposures and to tap new opportunities. “The Bank had established prudential norms on liquidity risk several years ago which all banks, including those exposed to GBCs doing businesses with India, have been observing,” said Mr. Basant Roi. 

In parallel, banks dealing with the GBC sector also had comfortable capital buffers. “The strong capital base of international banks adds an extra layer of comfort regarding their capacity to withstand adverse GBC-related shocks.”

Domestic supply-side hurdles represent a third challenge to growth as evidenced by delays in the implementation of projects. The contribution of investment to GDP growth remains significantly below that needed to steer the economy up to achieve high-income country status. “Measures to fast-track the implementation of public and private sector projects – some of which have been announced in the Budget 2016-17 – are important pre-requisites to help lift the country out of the middle-income trap and allow it to graduate to high-income status,” says the Governor of the central bank.

The central bank’s monetary policy stance has remained broadly accommodative in 2015-16, underpinned by falling inflation in an environment of declining in global energy, food and other commodity prices. The Key Repo Rate was reduced to 4.40 per cent by the Bank’s Monetary Policy Committee (MPC) in November 2015 and further to 4.00 per cent in July 2016 in view of downside risks to the growth outlook amidst low inflation prospects. The Bank is vigilant to upside risk to the inflation outlook that may emerge from global economic recovery going forward and to an increase in the domestic growth momentum, as these are potential vectors of inflationary pressures in the economy.