Dr Bhavish Jugurnath : “The Finance Minister must usher in a New Social Paradigm”

The countdown for the Budget 2018-2019 has begun. We are just one week away. What measures could be brought to stir up our economy? In the interview that follows, Economist Dr Bhavish Jugurnath shed light on various important aspects.

He highlights that this Budget is an opportunity for the government to promote better living conditions and at the same time proposing an Angel Investors Tax Deduction scheme to revamp the SME sector.

A better living condition for the population is the aim of the Prime Minister and Minister of Finance. Does he have enough leeway in this upcoming Budget to accomplish this aim?
The upcoming Budget is an opportunity for the Government to lay the foundations for better living standards across Mauritius. The first debate is whether Mauritius might improve its economic performance in the medium-term; the second, how the Government’s detailed moves are likely to affect different groups.

I believe the key planks of the Prime Minister and Minister of Finance and Economic Development is to meet five central pressing challenges that will have significant bearing on the living conditions of the population and the economy as a whole.

These are: Fostering higher growth for more and better jobs; investing massively in the infrastructure of the future; further improving the quality of life of our people and ushering in a New Social Paradigm and last, consolidating macro-economic fundamentals.

However, in view of supporting these ongoing economic reforms, financing the budget deficit will be the crucial part and the question all economists are asking is: Does the Prime-Minister have the leeway? We should note, in previous years India has been providing a stabilising economic foundation in the form of various financial grants. Last year Mauritius benefited from a robust financial support from India to implement several key development projects and programmes.

Coupled with an envelope of Rs 4.5 billion, which was approved in February 2012, the Government of India has offered another financial support envelope of USD 500 million, that is, around Rs 18 billion, through a line of credit.

Adding to that, a grant of Rs 12.7 billion was issued to Mauritius, amounting to a total of Rs 35.2 billion. As such, financing these reforms remains important, given that next year might be an election year and we might also expect some popular economic measures.

Against the backdrop of Mauritius continuing digital transformation to become a Smart Nation, there is a pressing need for the country to have sustainable revenues for investing in its future, and yet remain competitive internationally.

How can he further improve the living standard through a budget?
Mauritius now faces a number of challenges that are likely to slow growth in incomes in the future. The Mauritian population is ageing, which means that we will continue to see a lower proportion of our population in the workforce. In addition, the country’s terms of trade have fallen. A major goal of a budget and its accompanying policies are to improve the level and sustainability of living standards of the population and Mauritians in general.

Income is one of the most important determinants of living standards. Increasing real incomes allow people the capacity to buy more goods and services, and save and invest, as well as more freedom to choose how to spend their time. Income growth also means that potentially more tax revenue is available to provide government services and income support.

For incomes to grow, the government will have to pursue new growth opportunities and use our resources more productively. Ultimately, it is the efforts, creativity and risk-taking of businesses, investors and workers together that create new and better goods and services, and more efficient ways of doing things.

This then creates wealth, jobs and opportunities. Government policies and decisions influence how well markets operate and incentives for work and enterprise, and can have a profound impact on current and future rates of economic growth of Mauritius.

One of the main highlights of the previous Budget has been the introduction of the Negative Income Tax. Can we expect another set of bold measures from the PM for this Budget?
I believe with the end of the mandate of the present government, the aim will be to present a very good budget and technically, the key challenge for the Prime Minister for the next Budget  will be to decrease the overall budget deficit to around 3 per cent of GDP compared to around 3.6 per cent in 2017/18.

In this respect, there is significant need for structural reforms to improve the productive potential of the Mauritian economy. At the heart of the changes required is a mindset and culture that rewards individuals’ and firms’ hard work and initiative.

This change in mindset needs to be shared by all sectors of society, including individuals, business and government. On the Government’s part, this requires changes to policy settings to encourage people to work and to innovate, and which promote greater openness and competition in markets. This Budget should make a significant down payment on these reforms.

At the heart of the changes required is a mindset and culture that rewards individuals’ and firms’ hard work and initiative. This change in mindset needs to be shared by all sectors of society, including individuals, business and government.

What, according to you, should be the Top 3 priorities of the Finance Minister?
Technology is rapidly changing service delivery in both the public and private sectors. Against the backdrop of Mauritius continuing digital transformation to become a Smart Nation, there is a pressing need for the country to have sustainable revenues for investing in its future, and yet remain competitive internationally. The Top 3 Priorities for the forthcoming budget 2018/19:

First, implement Tax concessions to help companies “go digital” that are tied to growth. There are hefty costs involved for a company to move into a digital environment. Companies including start-up enterprises will incur expenditure that span from the hardware infrastructure to labour costs of digitising data, information migration and staff training. In this regard, targeted reliefs for example enhanced deductions or capital allowances would help.

Second, we have the Mauritius Global Value Chain and IP. The main driver for Mauritian companies in this digital age to move up the value chain is to develop knowledge-intensive, high value-added activities, which lead to the creation of unique and valuable intangibles.

To this end, Income Tax Act requires to be amended to include the acquisition of legal rights to the IP in order to qualify for an automatic tax deduction. This could be supplemented by an IP box regime to encourage exploitation of IP in Mauritius.

Third, consolidating the Traditional Sectors. Innovative approaches are needed across our traditional productive sectors to increase productivity, conserve natural resources, and use inputs sustainably and efficiently. Such approaches will require the participation of all stakeholders.

The government should aim for sustainable production systems, which require integration across the sectors and of social, economic and environmental considerations. It should focus on ways to ensure the transition to sustainable practices.

Mauritius has been aiming to achieve the status of a High Income Economy. How far do you think it is achievable?
The forthcoming Budget is poised to provide a strong framework for the economic revival of the country with an expected growth rate of 4.0 per cent in 2018/19. It should be noted that the Mauritian economic growth is improving steadily, with a growth rate of 3.8 per cent in 2017/18, compared to 3.2 per cent in 2016.

The underlying aim of the forthcoming Budget should be to uplift Mauritius to a high income country by 2023, with an income per capita of around USD 13,600 against the current level of USD 9,740.

It should be noted that the Mauritian economic growth is improving steadily, with a growth rate of 3.8 per cent in 2017/18, compared to 3.2 per cent in 2016.  The underlying aim of the forthcoming Budget should be to uplift Mauritius to a high income country by 2023.

What should be done to attract more FDI in the country?
FDI are important for all countries. Foreign investments are important to use because they bring new capital, new technologies, know-how, new management skills, new services and offer and employ our people.

Employment is the most important for Mauritius considering statistics of the unemployment rate. Foreign investments will contribute to faster economic development of Mauritius, increase GDP, citizens’ standards and the purchasing power of population.

In order to attract more FDI, we need to implement necessary reforms related to the business environment, which represent obstacle to local and foreign investors for their faster development and larger investments. Those obstacles are related to process of issuance of different kinds of permits starting for construction to employment of foreign citizens, issuance of VAT number, lack of financial incentives, and similar.

Implementation of those measures will contribute to improve the business environment competitiveness, which will attract more foreign investors to the countries.

We also need to improve the work of our economic diplomacy for attracting foreign investors. Finally, we need to be more promoted abroad through foreign media in order to inform larger international business environment about possibilities for investing in our various countries, because some investors don’t know much about our potentials. 

The SME sector has been considered as a backbone of our economy, yet it is still into trouble waters. How can we revamp this sector?
I am proposing an Angel Investors Tax Deduction scheme, as is the case in many developing countries. Access to funds is crucial for start-ups. Many start-ups need early stage financing and co-investing programme.

However, to boost the growth of start-ups particularly in the technology industry, the government can consider liberalising an Angel Investors Tax Deduction (AITD) scheme to make it easier for individual investors to qualify.

A suggestion could be to waive the eligibility conditions and approval requirements for an Angel investor under an AITD scheme for certain classes of wealthy individuals e.g. Accredited Investors.

The sugar sector is facing a crisis. How could the government help to put this sector back on track?
As a small vulnerable economy, which has to operate in a globalized environment, Mauritius needs a roadmap that will allow it to preserve its sugarcane sector and its multiple benefits and to transform the present threats into opportunities.

Such a roadmap should address the following challenges: preserve and consolidate the foreign exchange earnings from the sector to ensure a stable and predictable revenue for our food imports; preserve the livelihood of small planters and employees and their families who depend directly on the sugarcane sector; optimise value-added of sugar and its co-products; optimize the production of environment friendly sources of energy, electricity from bagasse and ethanol from molasses; preserve the secondary employment created by those who indirectly service the industry, namely the SMEs have built on this foundation to create employment and tackle poverty; and ensure that the corporate sector is pro-active, with a leaner and more efficient organization which will allow it to meet the challenges of decreasing sugar prices.

Innovative approaches are needed across our traditional productive sectors to increase productivity, conserve natural resources, and use inputs sustainably and efficiently. Such approaches will require the participation of all stakeholders.

Some sectors of our economy are starting to lag behind. What can be done to prevent the Finance sector from facing the same situation?
At 12%, the contribution of the financial services sector to the Gross Domestic Product is significant for the country, and is one of the most important pillars for the Mauritian economy. At the same time, the landscape of the financial services sector is changing due to international reforms in the taxation, including from the OECD.

In order to enhance Mauritius as a jurisdiction of reputation and substance, key measures should be implemented in order to safeguard the reputation of Mauritius as an International Financial Centre and also to open the economy further for prospective investors. Key policy measures could be:  The tax requirements for Global Business Companies need to be reformed in order to align to international standards.

The legal obligations pertaining to Special Purpose Funds need to be aligned with GBC1 companies. In order to benefit from the Fintech revolution, the Economic Development Board needs to establish a Regional Fintech Association.

The Financial Services Commission need to develop the necessary legislation for Fintech, the Stock Exchange of Mauritius need to transform the local bond market and set up an international capital market to attract African companies and governments.

Unfortunately, the Audit report showed wastage in various sectors, what measures should the Finance Minister take into this Budget to prevent such a situation to arise again?
Although there is no yardstick to evaluate output in the public sector, this vital area cannot remain beyond managerial control. Contributing to government through taxation, direct and indirect, citizens need to be satisfied with public services and facilities. It comprises the civil service, disciplined forces, local and regional bodies, parastatal bodies and state companies subsidised by government.

Performance Audit in the public sector might help in holding implementers of Government programmes accountable for the economic, efficient and effective discharge of programmes. This may promote better public service delivery while enhancing public accountability and management. More specifically performance audit will help in the identification of problem areas, including factors that cause problems.

This helps in finding alternative solutions, that is, through recommendations for improvements to policies, procedures and structure which could help in reducing wastage and inefficiencies.

What new sectors should be given more consideration in this Budget?
Developments in the world economy recently have been overwhelmingly detrimental to the traditional “pillars” of the Mauritian economy. There is a general consensus now that the information and communication technologies (ICT) sector will be an important component of the future socioeconomic development and economic growth of our country.

The global environment for cross border trade in services, especially the so-called “I. T. enabled services” is fast becoming a major area of growth in international trade.

This has been made possible through the convergence of three main factors: Advances in technology have made it possible to engage in trade across borders which were not possible before without the actual physical movement of providers of services; the availability of a large source of educated labour in certain developing countries at rates of compensation not comparable to what exists in developing countries; a new view of the value chain and constant search for competitiveness have led to the out location of service activities by multinational enterprises in the manufacturing and services industry to offshore locations.

Such is therefore the favourable internal and external contexts from which the ICT sector can benefit in the foreseeable future. Our success or not in materializing our dream of a cyber island will therefore depend on our own ability to take up the challenges of developing an industry by building on our strengths and minimizing our weaknesses.

However, the Government should not neglect and should also consolidate traditional productive sectors such as agriculture, manufacturing and fishing. Innovative approaches are needed across our traditional productive sectors to increase productivity, conserve natural resources, and use inputs sustainably and efficiently.

Such approaches will require the participation of all stakeholders. The government should aim for sustainable agriculture sector production systems, which require integration across the sector and of social, economic and environmental considerations. It should focus on ways to ensure the transition to sustainable practices.